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Abu Dhabi, UAEMonday 10 December 2018

Some relief for UK consumers as inflation eases

Rate in the year to February stood at 2.7 per cent, down on January's rate of 3 per cent and takes inflation to its lowest level since July

Shoppers at the Westfield Stratford City shopping centre in east London. UK inflation has fallen, easing the burden on consumers. Suzanne Plunkett/Reuters
Shoppers at the Westfield Stratford City shopping centre in east London. UK inflation has fallen, easing the burden on consumers. Suzanne Plunkett/Reuters

Inflation in Britain eased markedly during February, official figures showed Tuesday, in a development that will take some pressure off households who have seen Brexit-related price rises outstrip wage increases for months.

The Office for National Statistics said consumer price inflation in the year to February stood at 2.7 per cent. That was down on January's rate of 3 per cent and takes inflation to its lowest level since July.

The decline was largely due to transport and food prices, which rose by less than a year ago. That could be a sign that the impact of the weaker pound following the country's vote to leave the European Union in June 2016 may start to be wearing off.

"A small fall in petrol prices alongside food prices rising more slowly than last year helped pull down inflation, as many of the early 2017 price increases due to the previous depreciation of the pound have started to work through the system," said agency statistician Phil Gooding.

Alhough inflation has dropped back and in theory eases the pressure on the Bank of England to raise rates again, many economists think another hike could come as soon as May. After all, price increases are still above the Bank of England's 2 percent target.

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The central bank raised its benchmark rate by a quarter-point to 0.5 per cent in November, its first increase in a decade, largely to get inflation back to target. Its most recent economic projections suggested it may need to raise rates again soon, despite uncertainty surrounding Brexit.

Many economists think that Monday's deal between the British government and the EU on the outlines of a transition period after Brexit day on March 29, 2019, makes a rate hike more likely.

Bank of England Governor Mark Carney said confirmation of a transition deal, which will see Britain remaining in the tariff-free single market and customs union until the end of 2020, should give some certainty to businesses. And that could make the bank reassess its outlook for the economy.

The British economy has slowed sharply since the country Brexit vote as businesses reined in investment and consumer spending eased after a fall in the pound pushed up prices, especially for imports like energy and food.

There are hopes that wages will soon start to rise by more than prices, encouraging household spending. Bank of England forecasts suggest that could happen soon.

"This, combined with the latest Brexit progress, which bolsters the Bank's argument that the move to the post-Brexit world will be smooth, makes a May rate hike increasingly likely," said James Smith, developed markets economist at ING.

More clarity on the Bank of England's thinking will likely emerge Thursday when its next interest rate decision is announced along with the minutes of the meeting of the nine-member rate-setting panel.