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Households set for reprieve from spending squeeze as inflation falls

UK News | Published:

Sterling’s slide since the Brexit vote has ratcheted up the cost of living.

File photo dated 26/01/18 of UK money (Dominic Lipinski/PA)

Households are set to catch a break from the persistent pressure on their finances as inflation eases for the first time since December.

The Consumer Prices Index (CPI) measure of inflation is expected to have fallen to 2.8% last month when official figures are released on Tuesday.

The move would see the cost of living drop back from 3% where it is has remained since the end of last year.

Sterling’s slide since the Brexit vote has ratcheted up the cost of living, climbing from 0.6% shortly after the EU referendum to a near six-year high of 3.1% in November 2017.

However, economists and the Bank of England believe inflation’s upward march has run its course and will start to unwind over the coming months.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the fall in inflation was unlikely to be a “one-off downside surprise”.

He said: “Just as the (Bank’s Monetary Policy Committee) was taken aback by how quickly core goods inflation shot up last year in response to sterling’s depreciation, so it will be surprised again this year by how quickly it falls.”

Motor fuels and food costs look set to be the main drivers behind inflation’s fall, as a push from supermarkets to pass higher import prices down to consumers starts to wane.

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Mr Tombs expects food price inflation to roll back to 3.5% in February, from 3.7% in January, knocking 0.02 percentage points off the headline rate.

He added: “We still think that the MPC will be surprised by how quickly inflation falls.

“We expect CPI inflation to fall to 2.1% in Q4, touching 2.0% in one month of the quarter, clearly undershooting the MPC’s 2.4% forecast and ensuring that it raises Bank rate only once this year.”

The Bank is widely expected to keep interest rates on hold at at 0.5% on Thursday, but the meeting will be watched closely amid expectations over another hike in May.

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Governor Mark Carney has already warned borrowers that rates will need to rise “somewhat earlier and by a somewhat greater degree” to get inflation back on target after stronger-than-expected growth in the economy.

Experts believe the comments last month paved the way for another quarter point rate rise as soon as May, with one more due by the end of the year, and another in 2019, which would see rates climb to 1.25%.

It comes after the Office for Budget Responsibility hiked its outlook for economic growth this year, to 1.5%, from 1.4% previously predicted, in its Spring Statement forecasts.

It also said it believed inflation would fall back to the Bank’s 2% target this year.

The Bank is more upbeat on the growth outlook, pencilling in 1.8% expansion this year, although it is not so cheery on the path of inflation.

It said in its February report that rising oil prices would keep inflation above 3% in the short-term and see it take longer to return to target.

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