'Picture Remains Bleak' Despite Inflation Fall To 2.7% In February

The 12-month rate is at its lowest since March 2017, after remaining at 3% in December and January, as the post-referendum fall in sterling continues to drop out of the figures.

Inflation beats expectations to stick at 3% putting further pressure on BoE to hike rates in May

The ONS said all the broad categories of goods and services except communication had an upward effect on the Consumer Prices Index 12-month rate of 2.7% in February 2018, while communication had a small downward effect on the rate, with prices falling by 0.3% in the year. Conversely, the rate for alcohol and tobacco, at 5.7%, was the highest since December 2013.

The largest change was seen in transport, which fell from 0.8% in January to 0.35% in February.

It added: "The contribution from food and non-alcoholic beverages continued to increase, being offset by a fall in the contribution from transport and in particular, motor fuels.

"However, during the first two months of 2018, the contributions from both of these categories have fallen back."

Has UK inflation peaked at 3%? Market reacts to unexpected October hold

February's CPI rate of 2.7% exceeded analysts' expectations of a drop to 2.9%, and raises questions over whether the Bank of England will need to hike rates at the May meeting.

Over the last 12 months, CPI's peak was in November when it measured as 3.1%

At time of writing, the FTSE 100 was up 0.16%, while sterling was 0.1% higher against the dollar at $1.4037.

Reaction

Laith Khalaf, senior analyst at Hargreaves Lansdown, said: "It looks like the impact of a weaker pound is finally wearing off and inflation is gradually heading back towards target.

In theory that relieves some of the pressure on the Bank of England to raise interest rates, though falling inflation is very much in their script, so these latest figures don't really alter what we can expect from the Bank in the coming months."

Head of retail platform strategy at Zurich Alistair Wilson said: "While a slight decrease in inflation is certainly welcome, family finances are still feeling the strain.

"We may also see one, if not two rate rises before the year end - welcome relief for savers, but something that could heavily impact homeowners with variable and base rate mortgages."

Thomas Wells, manager of the Smith & Williamson Global Inflation-Linked Bond fund, said: "UK Consumer Price Index (CPI) came in at 2.7% for the 12 months to the end February, still above target but it appears to have now established a gentle glide path down, with headline CPI approaching target by the end of the year.

"All in all, the picture remains bleak for the UK consumer and perhaps more worrying is the increasing frequency of distress flares from companies, particularly those in the consumer discretionary sectors.

"Carpetright, Mothercare, Toys R Us and Maplin are all recent examples of companies that have struggled in this environment."