Inflation in decline

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Earlier this morning, ONS released the figure for CPI annual inflation in February.

CPI inflation fell 0.2 percentage points to 1.7% in February, which is the lowest rate for more than four years (see the graph below). The downward movement in the rate was contributed mainly by motor fuels and energy prices, similar to previous months, but marginally offset by upward contributions from prices of furniture & household goods, and recreation & culture.

Source: EEF and Oxford Economics, 2014

We expect to see the CPI inflation rate continues to drop in March, to 1.5%, largely because of base effects arising from the 4p per litre increase in petrol prices in March 2013.

Looking ahead, inflation is likely to average similar rates for the most of this year, and into 2015. There is little sign of any inflationary pressure from commodity prices or the supply chain. At the same time, the relative strength of the pound will continue to push down import costs, while there is likely to be a positive base effect on domestic energy bills from the impact of changes to the Energy Companies Obligation scheme, which are still to feed into the consumer price indices.


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