Inflation drops to 2.7% but ‘picture remains bleak’

The Consumer Prices Index (CPI) dropped to 2.7% in February, down from 3% the month before, setting inflation on a slow course towards the Bank of England’s 2% target.

Inflation drops to 2.7% but 'picture remains bleak'

The Office for National Statistics announced today transport and food prices were the largest downward contributions to the rate after rising by less than they did a year ago. Falling prices for accommodation services also had a downward effect, it said.

The rate is slightly below economists’ forecast of 2.8%.

The downward step in inflation eases pressure on the BoE to increase rates, although the rate is still above its 2% target.

Nick Dixon, investment director at Aegon, said the big question remains over interest rates.

He said: “With only a slow trend down, inflation risks on the upside, and US rate pressure building, we are likely to see a few interest hikes here in the UK during 2018.

“Aegon continues to see the big risk as interest rates rising above the current yield curve, which will put downward pressure on fixed income prices, especially those such as government bonds with low yield support.

“With fixed income vulnerable and equity volatility rising, we see additions to cash weightings as a prudent step for the majority of investors.”

Thomas Wells, manager of the Smith & Williamson Global Inflation-Linked Bond fund, said the picture “remains bleak for the UK consumer” and perhaps more worrying is the increasing frequency of distress from companies operating in the consumer discretionary sector.

“Carpetright, Mothercare, Toys ‘R’ Us and Maplin are all recent examples of companies that have struggled in this environment,” he said. “Whether the BoE should be so clearly wedded to tighter policy in such an environment is a moot point.

“Average weekly earnings, which are due out tomorrow, will be of potentially higher importance to the BoE which is looking for evidence the demand side is in rude health.”

 

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