Inflation dips to 2.7% as impact of Brexit vote starts to fade

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

The consumer price index (CPI) fell to 2.7% last month from 3% in January, according to the Office for National Statistics, beating economists’ expectations of 2.8%. That puts the barometer for the cost of living in Britain at its lowest level since July last year.

Phil Gooding from the ONS said a small fall in petrol prices alongside food prices rising more slowly 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 ONS said hotel prices also fell last month and the cost of ferry tickets rose more slowly than a year ago.

The faster fall 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.


What is inflation and why does it matter?

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.

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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.

On the flipside, 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 – pushing inflation back above 3% this year, which could force Threadneedle Street to act.