Cost of living squeeze eases after a small fall in both petrol and food prices, says ONS

This article is more than 2 years old

This article is more than 2 years old

Inflation fell further than expected last month, as the impact of the Brexit vote on the price of petrol and food began to fade, easing the pressure on squeezed British households.

The consumer price index (CPI) fell to 2.7% in February, down from 3% in January, according to the Office for National Statistics. Economists had expected a CPI of 2.8%. The new reading puts the barometer for the cost of living in Britain at its lowest level since July last year.



Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk

Phil Gooding from the ONS said a small fall in petrol prices alongside a slower rise in food prices than last year helped to pull down inflation: “Many of the early 2017 price increases due to the previous depreciation of the pound have started to work through the system.”



The pound plunged immediately after the leave vote, driving-up the cost of importing fuel and food to Britain and putting intense pressure on household finances. Consumer spending has fallen as a consequence, while average wage growth has failed to beat inflation since the middle of last year.



.



The faster than expected decline in the rate of inflation will please the UK chancellor, Philip Hammond, as it brings closer the point at which real wage growth should return for British workers. The ONS will deliver an update on workers’ pay and the country’s latest employment figures on Wednesday.



The ONS pointed to falling hotel prices and the cost of buying ferry tickets rising more slowly than a year ago. The price of seasonal produce such as fresh vegetables also rose by much less than a year ago, when flooding and storms in the Mediterranean led to a poor harvest.

Q&A What is inflation and why does it matter? Show Hide Inflation is when prices rise. Deflation is the opposite – price decreases over time – but inflation is far more common. If inflation is 10%, then a £50 pair of shoes will cost £55 in a year's time and £60.50 a year after that. Inflation eats away at the value of wages and savings – if you earn 10% on your savings but inflation is 10%, the real rate of interest on your pot is actually 0%. A relatively new phenomenon, inflation has become a real worry for governments since the 1960s. As a rule of thumb, times of high inflation are good for borrowers and bad for investors. Mortgages are a good example of how borrowing can be advantageous – annual inflation of 10% over seven years halves the real value of a mortgage. On the other hand, pensioners, who depend on a fixed income, watch the value of their assets erode. The government's preferred measure of inflation, and the one the Bank of England takes into account when setting interest rates, is the consumer price index (CPI). The retail prices index (RPI) is often used in wage negotiations.

Although wage growth is unlikely to rise above inflation just yet, the chancellor told MPs at the spring statement last week that he expected inflation would fall back to the government’s target rate of 2% and that pay would rise at a faster rate within the next 12 months.



The financial secretary to the Treasury, Mel Stride, said the government was cutting taxes and raising the minimum wage for the lowest earners. “This is part of our plan to build an economy that works for everyone.”

Despite the promise of rising wages, some economists expect average earnings will remain below their pre-financial crisis peak until at least the middle of the next decade, making the post-crash era one of the worst periods for pay growth since the Napoleonic wars.

Labour said the latest figures showed workers were still struggling with real earnings lower than when the Tories first came to power in 2010. Peter Dowd, shadow chief secretary to the Treasury, said the spring statement was a “missed opportunity that exposed Philip Hammond’s complacency, as it contained no new measures to deal with this rising burden faced by many working families”.

However, the bigger-than-expected fall in price growth could undermine the Bank of England’s arguments for raising interest rates from as early as May.



Mark Carney, the Bank’s governor, has suggested rising global oil prices and an upswing in the world economy could offset the fading impact of the Brexit vote, which could force Threadneedle Street to act.



The Bank’s monetary policy committee, which could provide a hint for a May rate hike at its next meeting on Thursday, will also be watching for greater evidence of wage growth to support its case for raising the cost of borrowing. Economists expect pay to rise this year amid the lowest levels of unemployment since the mid 1970s, which should help to increase their bargaining power to demand higher wages.

James Smith, an economist at ING Bank, said: “On the face of it, [the latest inflation reading] takes some of the pressure off the Bank of England to hike rates again in the near-term. However, policymakers are increasingly focusing on wage growth, which has been showing signs of life recently.”