Households’ inflation cheer as Brexit price pain eases

Russell Lynch
ING's economist James Smith: Firms are increasingly having to lift pay more rapidly in a bid to retain and attract talent: PA

The Brexit squeeze on hard-pressed households eased on Tuesday as inflation dropped to its lowest since last July.

The UK has been labouring under a surge in the cost of living since June 2016, when the vote to leave the EU torpedoed the pound and pushed up the cost of imports.

But the Office for National Statistics said there were signs that the previous depreciation had “started to work through the system” as the Consumer Prices Index fell to 2.7% in February from 3% the previous month.

Wages growing at 2.5% and further expected falls in inflation over the months ahead also mean light at the end of the tunnel for the real-terms pay squeeze hitting the UK.

Although inflation is falling faster than the Bank of England expected, experts said the slide was unlikely to deter the monetary policy committee from raising interest rates again in May. The MPC’s latest decision comes on Thursday.

ING’s economist James Smith said: “On the face of it, this takes some of the pressure off to hike rates again in the near term.

“However, policymakers are increasingly focusing on wage growth, which has been showing signs of life recently, potentially suggesting firms are increasingly having to lift pay more rapidly in a bid to retain and attract talent.”

The announcement of a transition deal with the EU has also dramatically reduced the potential risks of a hard Brexit next year, removing another potential barrier to the Bank of England raising interest rates.

The ONS said a much smaller rise in food prices than last year as well as falling petrol costs had driven the lower inflation, helped by dropping oil prices. One-offs such as much slower growth in ferry fares also dragged the headline figures lower.

Chris Williamson, chief business economist at Markit, said: “Given policymakers’ appetite to normalise policy, it’s likely that it would require severe disappointments in terms of the coming economic growth and wage data to derail plans to hike in May.”

Despite easing UK inflation overall, the ONS also showed London with the highest regional inflation in the country in 2016, with prices 7% above the national average.

In the capital, restaurants and hotels prices are 13% ahead of the UK while recreation and culture prices are nearly 15% higher, its figures showed.