British five pound banknotes and one pound sterling coins sit in this arranged photograph in London, U.K. (Photographer: Chris Ratcliffe/Bloomberg)

U.K. Inflation Slows More Than Expected as Pound Shock Fades

(Bloomberg) -- The U.K. inflation rate fell more than expected in February as the impact of the pound’s post-Brexit referendum slide abated.

Consumer prices rose 2.7 percent from a year earlier, down from 3 percent in January, the Office for National Statistics said on Tuesday. Economists expected an increase of 2.8 percent. The core inflation rate gained 2.4 percent.

“Forecasters were expecting price increases to ease back this year. But the rate of reduction is likely to remain slow and volatile,” said Andrew Sentance, a former BOE policy maker who’s now an economic adviser at PwC. The inflation data “provides little reason for the Bank of England to hold back from gradually raising interest rates.”

U.K. Inflation Slows More Than Expected as Pound Shock Fades

The pound dropped after the report, paring a gain of as much as 0.3 percent to trade little changed at $1.4018 as of 11:17 a.m. in London.

The slowdown is good news for consumers, who have seen rising prices eat into their spending power over the past year. The Bank of England, which meets this week, expects headline inflation to subside further as the effect of sterling’s 2016 deprecation fade. Policy makers will also be keeping an eye on wages, which economists expect to have picked up to 2.6 percent in January. The data will be published on Wednesday.

The central bank is expected to raise interest rates as early as May amid signs of strengthening domestically generated price growth. A majority of economists see a 9-0 vote for unchanged policy on Thursday before the central bank increases rates at their following meeting. Markets are pricing in about three interest-rate hikes over the next three years.

What Our Economists Say:

“Further out, a faster fall off in inflation is likely to mean the Bank of England finds itself with more wiggle room before it delivers the third hike of the current cycle.”

--Dan Hanson and Jamie Murray, Bloomberg Economics

“A small fall in petrol prices alongside food prices rising more slowly than last year helped pull down inflation,” said Phil Gooding, head of CPI at the ONS. “Many of the early 2017 prices increases due to the previous depreciation of the pound have started to work through the system.”

Upward pressure on prices came from clothing and footwear, in particular women’s shoes. Furniture, routine maintenance and household equipment also contributed to annual price gains.

Producer prices rose 2.6 percent from a year earlier, the least since 2016. Annual input price gains also eased, increasing 3.4 percent, the lowest since the Brexit referendum in June 2016.

House price growth slowed to 4.9 percent in January, leaving the U.K. average at 226,000 pounds ($318,000).

©2018 Bloomberg L.P.