Official inflation figures yesterday thwarted hopes of a rapid end to the squeeze on incomes and lowered expectations of the Bank of England's Monetary Policy Committee extending its programme of quantitative easing next month.
The latest report from the Office for National Statistics showed that consumer price index year-on-year inflation fell to 3.4 per cent in February, down from 3.6 per cent in the preceding month. Financial analysts had expected a fall to 3.3 per cent. Retail price index inflation, which includes mortgage interest payments, dropped to 3.7 per cent from 3.9 per cent.
"If inflation fails to fall as quickly as the MPC would like to see, then the Bank of England may well opt to keep policy on hold at the next meeting," said George Buckley, of Deutsche Bank.
The MPC justified the £50bn extension of its asset purchase scheme in February on the grounds that inflation would probably come in below the Bank's official 2 per cent target by the end of the year. Signs of stickiness in prices will strengthen the hand of hawks on the MPC.
The Bank's chief economist, Spencer Dale, who is also a member of the MPC, said in a speech in Cardiff yesterday that he personally suspects inflation will turn out higher than the consensus view of the MPC.
He said: "My own view is that the chance of inflation being above or below 2 per cent by the end of this year and into 2013 is somewhat more balanced".
Mr Dale cited the dangers that tensions in the Middle East could push up global energy prices and also disappointing UK productivity growth.
The ONS data showed that CPI was driven lower in February mainly by falls in energy bills and the fading impact of last year's increase in VAT. Discounting on digital cameras and air fares also pushed retail prices down. Inflation is now at its lowest rate since November 2010. But rises in alcohol prices prevented CPI falling lower. Spirits prices rose by 2.6 over the year.Reuse content