Inflation down from February to 1.7 per cent and could fall to 0.5 per cent over the summer

March 25, 2020 @ 9:35 by Richard Dawson

In just about the only bit of positive news on the economy at the moment, consumer price inflation edged down to 1.7 per cent in February from a six-month high of 1.8 per cent in January.

It is thought that inflation has come down largely because of lower fuel prices, which have been driven down due to a lack of demand for oil.

It looks as if inflation will continue to fall back over the coming months, which will provide some much-needed help for consumers and the economy by driving down prices.

This is because energy price inflation should be lower from April when the April 2019 increase in Ofgem’s electricity and gas price caps will drop out of the year-on-year comparison. Additionally, Ofwat has proposed lower water and sewerage price caps from April.

While the drop in inflation is likely to be limited by the fact that the pound sterling has lost a lot of its value in recent weeks, the EY ITEM Club posits that it could get as low as 0.5 per cent over the summer.

Howard Archer, chief economic adviser to the EY ITEM Club, commented: “Consumer price inflation edged back to 1.7 per cent in February, after spiking to a six-month high of 1.8 per cent in January from 1.3 per cent in December, which had been the lowest level since November 2016.

“Inflation had previously weakened to December’s level from 1.5 per cent in November and October, 1.7 per cent in September and August, and an equal 2019-high of 2.1 per cent in July.

“Consumer price inflation averaged 1.8 per cent over 2019, down from 2.5 per cent in 2018 and 2.7 per cent in 2017.

“At 1.7 per cent in February, consumer price inflation moved further below the Bank of England’s 2.0 per cent target rate.

“The Office for National Statistics said the February inflation data largely predated the effects of coronavirus.

“Inflation was helped down in February by lower fuel prices. The price of petrol fell by 2.4p/litre between January and February compared to a drop of 0.5p/litre a year earlier.

“There was also downward pressure on inflation from video games, alcoholic beverages and tobacco, food, furniture, household equipment and maintenance. Upward pressure on inflation in February notably came from restaurants and hotels.

“Inflation looks certain to fall back sharply over the coming months. The recent plunge in oil prices to a 16-year low will bring inflation down, along with sharply weakened economic activity in the near term at least.

“The lockdown of the UK – reinforced by consumer concern over their jobs and pay (despite support from the Government) – will weigh down on demand and likely exert downward pressure on prices despite the supply side shock.

“We suspect consumer price inflation could get as low as 0.5 per cent over the summer.”

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