Press release

25 Mar 2020 London, GB

Consumer price inflation edged down to 1.7% in February; set to fall back over coming months

In the current fraught environment, any piece of helpful news on the economy – however tiny – is to be welcomed.

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EY UK&I Media Relations Manager

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  • In the current fraught environment, any piece of helpful news on the economy – however tiny – is to be welcomed. A dip in consumer price inflation to 1.7% in February from a six-month high of 1.8% in January is a small step in the right direction for consumer purchasing power.
  • Inflation was helped down in February by lower fuel prices.
  • Inflation looks certain to fall back markedly over the coming months, which will provide some much-needed help for consumers and the economy. The recent plunge in oil prices to a 16-year low will bring inflation down, along with weakened economic activity in the near term at least.
  • Inflation should be helped lower in the second quarter as it benefits from lower energy price inflation 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.
  • Evidence of waning price pressures further down the supply chain in February was evident in producer input prices falling 1.2% month-on-month and 0.5% year-on-year. Meanwhile, the annual increase in producer output prices moderated to 0.4% (the lowest since July 2016) from 1.1% in January as they fell 0.3% month-on-month.
  • While the drop in inflation is likely to be limited by sterling’s weakness, the EY ITEM Club suspects it could get as low as 0.5% over the summer.

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

“Consumer price inflation edged back to 1.7% in February, after spiking to a six-month high of 1.8% in January from 1.3% in December, which had been the lowest level since November 2016. Inflation had previously weakened to December’s level from 1.5% in November and October, 1.7% in September and August, and an equal 2019-high of 2.1% in July. Consumer price inflation averaged 1.8% over 2019, down from 2.5% in 2018 and 2.7% in 2017.

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

“Core inflation edged up to 1.7% in February from 1.6% in January and 1.4% in December (the lowest since November 2016). It had earlier been 1.7% in November, October and September. 

Outlook for inflation

“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. Specifically, Brent oil fell to a more than 16-year low of $25.23/barrel on 18 March compared to around $65/barrel in late-January. Brent is currently trading around $28/barrel.

“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.

“Evidence of waning price pressures further down the supply chain in February was evident in producer input prices falling 1.2% month-on-month and 0.5% year-on-year. Meanwhile, the annual increase in producer output prices moderated to 0.4% (the lowest since July 2016) from 1.1% in January as they fell 0.3% month-on-month.

“Inflation should be helped lower in the second quarter as it benefits from lower energy price inflation 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.

“The drop on inflation is likely to be limited by sterling’s weakness. The pound fell to its lowest level since 1985 against dollar of $1.1413 on 20 March; it also fell to its lowest level against the euro since March 2009 (95.0 pence).

“Nevertheless, we suspect consumer price inflation could get as low as 0.5% over the summer.”