Inflation hits lowest rate since 2021 – business industry reaction

Latest ONS data has found that inflation came in at 3.4% in February, well below the 4.0% reported in January.

Economists had forecast a drop to 3.5%. The figures also showed that food inflation has fallen for the 11th consecutive month. Prices were up 0.6% in a month (compared to 1.1% a year earlier).

Inflation is now at its lowest point in almost two and a half years, and well down from the peak at 11.1% in October last year.

ONS Chief Economist Grant Fitzner said “Inflation eased in February to its lowest rate for nearly two and half years.Food prices were the main driver of the fall, with prices almost unchanged this year compared with a large rise last year, while restaurant and café price rises also slowed.

“These falls were only partially offset by price rises at the pump and a further increase in rental costs.”

Tina McKenzie, Policy Chair, Federation of Small Businesses (FSB) said “Any easing in inflation brings relief to small firms, and today’s reported drop is a step towards reducing interest rates by the summer.

“However, we mustn’t discount the cumulative damage that has been done to small businesses’ margins and cash reserves by inflation having been so high for so long.

“With the fall reported today driven largely by falling food prices for consumers, the hope is that this will ease some of the pressures on household budgets, to the eventual benefit of small firms in consumer-facing sectors.

“Small firms ended last year with a decrease in confidence levels, indicating that this first quarter would be tricky in many respects. However, many of the key economic indicators published so far have been a slight improvement compared with 2023, giving rise to a feeling of cautious optimism.

“In order for any optimism to be nurtured, the promising start signalled by the increase in the VAT threshold to £90,000, the announcement on apprenticeships from the start of the week, and the business rate relief for small firms in the retail, hospitality and leisure sectors should be built on.

“What unites these growth-promoting measures is that they are targeted where they will have the most impact: on small firms, who are the ones with the potential to expand and kick the economic recovery into a higher gear.

“Measures to ensure employment levels are maintained and improved are also needed. Wage inflation has eroded the Employment Allowance’s relative value, underlining the need for it to be uprated, especially with the impending rise in the National Living Wage. This will help small employers keep people in work, and to grow their workforce.

“Politicians and policymakers should remember that small firms have been the driving force behind our recovery from past recessions, and this time around it’ll be no different, if they are given the right conditions to start up, scale up, and prosper.”

Dr. Roger Barker, Director of Policy at the IoD, said “Although a sharp decline in February’s inflation figures was largely anticipated by business, it is nonetheless reassuring to see concrete evidence of inflation falling to within striking distance of the Bank of England’s inflation target. The latest data provides concrete evidence that the inflationary battle is now well and truly under control, and provides justification for an early cut to interest rates.

“Inflationary pressures have now been largely squeezed out of goods markets, where inflation is running at only 1.1%. Price rises have also been moderating in the food, restaurants and hotel sectors, which until recently were significant areas of concern. However, there is still further to go in terms of service sector inflation, where prices are still rising at a stubbornly high rate of more than 6%.

“The journey towards lower inflation has been painful and costly for business. However, this data demonstrates that there is light at the end of the inflationary tunnel. Although business confidence in the UK economic outlook remains at depressed levels, today’s figures provide a welcome tonic.”

Julian Jessop, Economics Fellow at the free market think tank, the Institute of Economic Affairs, said “The latest drop in inflation demonstrates the urgent need for the Bank of England to begin cutting rates. The renewed slowdown in the headline rate – to 3.4% in February – paves the way for annual inflation to fall below the 2% target in April when the new Ofgem cap on energy bills kicks in.

“Indeed, the consumer price index has been little changed since September, meaning that shorter-term measures of inflation are now close to zero. This is consistent with the sharp slowdown in the growth of money and credit.

“Some underlying measures are still high, notably annual services inflation which is running at 6.1%. But with plenty of evidence that the labour market is cooling, and inflation expectations are dropping, fears of a ‘wage-price spiral’ should fade too.

“By far the bigger risk is that having been too slow to act when inflation was taking off, the Bank of England will now be even slower to respond on the way down.”

Alpesh Paleja, Lead Economist, CBI, said “Inflation is heading in the right direction, and should fall below the Bank of England’s 2% target sometime in the Spring. However, the path beyond this is likely to be bumpy: shifting base effects mean that it will likely rise back above 2% later in the year, before settling down more sustainably.

“While the Bank of England are likely to look through these ups and downs, they will still want to see more definitive movement on domestic price pressures before committing to cutting interest rates.”

Suren Thiru, Economics Director at ICAEW said “This notable decline is further evidence that the UK is fast approaching the finish line in its battle against surging inflation. The last mile of this inflation marathon should be the easiest with lower energy bills, following the cut in Ofgem’s energy price cap, likely to drag the headline rate back to the Bank of England’s 2% target in April.

“With the lagged impact of earlier interest rate rises and a weak economy likely to constrain price pressures throughout this year, the Bank of England’s forecast that inflation will start drifting higher later this year looks excessively downbeat.

“While interest rates will be kept on hold on Thursday, these figures may drive a more dovish vote split and meeting minutes as policymakers set the scene for summer rate cuts.”