Simeon Willis, Chief Investment Officer at XPS Group said: "With inflation, it’s always worth reminding ourselves that we already knew 11/12ths of what went into the 12 month calculation. The likelihood of this February’s price increases being greater than last February’s substantial price increases - which drop out of the 12 month calculation - was relatively low. Whilst there is still an expectation for inflation to increase before it falls, this wasn’t the month for it come through. Whilst near term inflation is well above the BoE’s 2% target, longer term inflation expectations have been declining in the last 2 months, meaning that the real yield on UK government bonds above inflation is hovering at a record high for the last 20 years around 2%. This is good news for reducing pension schemes liability values. However, there is the potential for continued above target near-term inflation to constrain the scope for interest rate cuts, hampering economic growth, which will hurt pension schemes in other ways, via their risky assets.”
Dean Butler, Managing Director for Retail Direct at Standard Life, part of Phoenix Group, said: “Inflation falling to 2.8% will come as a boost to the Chancellor immediately ahead of the Spring Statement, but it's likely to rise again before falling and the path to a lower inflation, lower interest rate environment remains uncertain. Above-target inflation will make it harder for the Bank of England to justify the significant interest rate cuts that could help facilitate individual and business financial confidence – and potential economic growth. In some relief, most forecasters suggest a gradual return towards the Bank’s 2% target next year. For borrowers and mortgage holders, the prospect of higher-for-longer interest rates will be frustrating. However, for savers, an extended period of elevated rates provides an opportunity. Easy-access cash savings deals at or just below 5% remain available, but as inflation picks up it will more aggressively erode real returns. Shopping around for the best rates remains crucial – there’s significant variation in rates across the market. For those more comfortable with taking on risk, investing can provide the potential for higher long-term returns, though it comes with no guarantees. Pensions offer the combined benefits of possible investment growth, employer contributions and tax efficiency - making them a compelling option for long-term savers.”
Nicholas Hyett, Investment Manager, Wealth Club: "Falling inflation is a welcome bit of good news. While not yet back at the Bank of England's 2% target, the faster than expected decline in inflation opens the door to interest rate cuts in the future should the Bank feel the wider economy needs a helping hand. That could be needed, since there are potential readings of a lower inflation rate that are less than positive. While falling inflation might reflect improvements in supply, as wider economic shocks subside and supply chains adjust, it could equally reflect a drying up in demand due to economic weakness. However, the challenge for Chancellor in the Spring Statement is the pockets where inflation remains high are likely to be particularly painful for voters. Rental costs rose 7.4% in the year to February, lower than last month but still exceptionally high. Looming changes to National Insurance and the National Living Wage will likely push prices across the board higher again in April. As with every piece of data at the moment, even a silver cloud seems to come with a gloomy lining."
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