Inflation set to ‘hold steady’ thanks to energy price cap

UK smart meter, picture by Steve Finan.
UK smart meter, picture by Steve Finan.

Inflation is expected to have held steady below the Bank of England’s target in February, thanks to the cap on energy prices.

Consensus estimates predict Office for National Statistics (ONS) figures will reveal on Wednesday that the Consumer Prices Index (CPI) rate of inflation was flat at 1.8% last month.

It is set to match January’s rate, which fell after the introduction of a cap on standard variable tariffs by energy watchdog Ofgem at the start of the year.

This is likely to continue to be the main factor keeping inflation low in February, putting it below the Bank of England’s 2% target.

But some factors could cause a surprise in February’s rate, according to Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

“The upside risk partly reflects the fact that January’s rate was just 0.002pp from rounding up to 1.9%,” he said.

“Inflation also likely will come under upward pressure in February from the food component, which we expect to rise to 1.2%, from 0.9% in January.”

According to the British Retail Consortium (BRC), food shop price inflation in February was 1.6%, up slightly from January’s 1.5%.

Falling petrol prices have also been holding inflation back in recent months, with the trend set to continue in February.

But Victoria Clarke, an economist at investment firm Investec, said this was unlikely to have a major effect.

“While this trend continued in February, it did so at a more modest pace and will therefore have a marginal effect on overall CPI when set against a similarly small decrease a year earlier,” she said.

“In fact, its impact ought to be neutralised by the uprating of duty rates on both wine and high-strength cider by RPI that was announced in the Autumn Budget.”

Services inflation is expected to be steady at 2.5%, without its usual boost from the half-term holidays.

Wednesday’s inflation figure follows weak manufacturing output in February, when the Markit/CIPS UK manufacturing purchasing managers’ index showed it fell to a four-month low.

The rate of job losses in the industry also grew, hitting a six-year high amid low optimism.

The February CPI rate will be the first to include goods added to the ONS’s representative basket, which reflects changing consumer habits.

Last week the agency announced the inclusion of baking trays, owing to the popularity of The Great British Bake Off.

Smart speakers, flavoured tea and electric toothbrushes also made it on to the list, while washing powder and envelopes were scrapped.

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