UK inflation expected to drop to near two and a half-year low â business live

Introduction: UK inflation report coming up

Good morning.

Eyes in the City of London, and Westminster, are on UK inflation, with the latest cost of living data due at 7am this morning.

Inflation is expected to have slowed last month; economists estimate the Consumer Price Index (CPI) will drop to 3.5% for February.

That would be the lowest in almost two-and-a-half years (since September 2021), and mean prices are rising at a slower rate than January, when annual inflation was 4%.

A drop in inflation could encourage the Bank of England to consider cutting interest rates in the coming months â as its mandate is to keep inflation sustainably at 2%.

Kyle Rodda, senior financial market analyst at capital.com, explains:

UK inflation data will be a precursor to tomorrowâs Bank of England meeting, with forecasters projecting a meaningful drop in prices last month.

Core inflation is expected to moderate to 4.6% from 5.1% in February, while headline is tipped to decline to 3.5% from 4%. Inflation in the UK has been more stubborn than other G10 economies, partly due to elevated wage growth and energy price shocks.

The dynamic means the markets are pricing in relatively fewer cuts from the Bank of England than other major central banks.

The government will also be hoping for a substantial drop in inflation, as it would bolster Rishi Sunakâs claim that âthe economy is turning a cornerâ, after it fell into recession at the end of last year.

The agenda

7am GMT: UK inflation report for February
9.30am GMT: UK house price and rental index for January
10.15am GMT: UK bank bosses to face questions from Treasury Committe
11am GMT: US mortgage applications data
3pm GMT: Eurozone consumer confidence report
6pm GMT: US Federal Reserve sets interest rates

Key events

Deutsche Bankâs chief UK economist, Sanjay Raja, is also expecting a substantial drop in inflation this morning.

Raja told clients:

We expect headline and core inflation to continue their descent.

Weaker food, goods and some services prices â combined with large negative base effects â should see inflation take a big step down in February.

We see headline CPI slowing to 3.4% y-o-y (Jan: 4%). Core CPI, we think, will drop to 4.5% y-o-y (Jan: 5.1%).

Those âbase effectsâ are the jump in prices a year ago, which pushed inflation over 10% in February 2023.

Economist Ellie Henderson of Investec predicts a sharp drop in inflation for February, as last yearâs big rises in costs for non-alcoholic drinks and clothing and footwear were not repeated this year.

But, she points out there are still inflationary pressures, as fuel prices rose last month.

Henderson adds:

âThere is also the risk that the disruption in the Red Sea resulted in higher input costs for producers in February, some of which could have been passed onto the consumer.

âThere is also the potential that the extra health certificate requirements that were introduced at the start of the month for medium-and-high-risk plant and meat imports from the EU caused a material increase in consumer prices.â