CHANCELLOR Alistair Darling gained a pre-Budget boost with the announcement of a sharper than expected fall in inflation in February.
Official figures showed a fall in the Consumer Prices Index (CPI) benchmark to 3% from a 14-month high of 3.5% in January as prices rose by less than a year ago.
The fall will also soothe concerns over the recent inflation spike lingering longer than expected and building pressure at the Bank of England for rate hikes.
Many experts now forecast borrowing costs on hold at their current 0.5% record low until the end of the year, helping to shore up a fragile economic recovery.
Jonathan Loynes, chief European economist at Capital Economics, said price pressures in the UK economy “remain encouragingly subdued“.
David Kern, chief economist at the British Chambers of Commerce, warned: “The economy remains weak, businesses are still facing serious pressures, and it would be wrong for the Monetary Policy Committee to contemplate early interest rate rises.”
The pound dropped below 1.50 against the dollar soon after the figures as markets weighed up the still-distant prospect of rising rates.
The Office for National Statistics (ONS) said inflation was dragged down by smaller price rises for items such as petrol, household goods and food than a year earlier, while average gas bills fell.
British Gas cut gas prices during February, triggering a round of further reductions by rivals which will feed into inflation figures in the months ahead.
Toys and games also dampened inflation this year as prices were unchanged compared with a big increase in costs a year ago.
Factors such as the VAT cut – and subsequent return to 17.5% in January – have introduced volatility into the monthly figures, as well as the desperate measures undertaken by firms to survive the worst of the recession last year. Far less discounting by retailers this year than 12 months ago – when most shops were slashing prices to tempt in consumers – put upward pressure on the cost of living in January, alongside the VAT rise.
Prices across the board rose at a far lower rate January to February than 12 months earlier – when CPI inflation surged at a record monthly rate of 0.9% – adding to February inflation this year.
Petrol prices rose by a record 3.2p per litre a year ago to stand at 89.5p, although this time round average prices rose by a far smaller 0.9p. Food and drink prices also rose by less than a year ago.
The only major upward impact this month came from women’s clothing, where prices rose by more than a year ago.