What it means for rates
It eases the pressure slightly on the Bank of England, especially given that core CPI (which excludes volatile food and fuel prices) also fell very slightly. However, it doesn’t change the fact that inflation is likely to rise from here, so it’s unlikely to mean a radical rethink by the Bank of England. It has already pledged to stay cautious on cuts in the coming months, and it’s going to stick with the plan. GDP data will also be fresh in its mind, and the fact the economy shrank in January. The Bank won’t want to keep rates too high for so long that growth stagnates entirely. On balance we’re expecting a rate cut in May or June, and a second around September.
What’s moving prices?
High street discounting helped enormously – especially women’s clothes, but also accessories and kids' clothes. Prices fell 0.3% in a month, which is very unusual for February. We haven’t seen this sort of thing since lockdown. Last year, for example, the same prices were up 2.1%. Usually the new season of clothes hits, and we refresh our spring wardrobes. This year, February felt decidedly wintery, so there’s every chance the discounts were a desperate attempt to get us back to the shops.
On the flip side, alcohol and tobacco stimulated inflation a little, rising 5.7%. It owes much to the fact that Jeremy Hunt’s freeze on alcohol duty finished at the end of January, so duty on non-draught alcohol rose. Food and drink inflation held steady at 3.3%, with rises in some parts of the trolley offset by falls in others. Poor weather around the world has pushed up the prices of trolley favourites, including butter, which is up 18.7%, chocolate at 16.5% and olive oil at 11.2%. This was offset by price falls elsewhere – with annual drops in the price of everything from pasta to fish, yogurt and margarine. The outlook remains mixed. On the one hand, with higher wage costs for supermarkets and producers in the pipeline for April, there will be some upwards pressure on prices.
However, with trolley wars breaking out for market share, we could see food inflation fall in the coming months. Awful April risks kick-starting inflation again. The energy price cap is forecast to go up by £85 to £1,823 – which would be its highest level since the beginning of last year. This is on top of rises in everything from water bills – up £123 on average - to council tax – up an average of £109. The Bank of England is expecting inflation to peak at 3.7% later this year."
What this means for savings
Mark Hicks, head of Active Savings, Hargreaves Lansdown: “Savings rates have been steadily creeping up over the past few weeks due to a combination of inflationary pressures globally and intense competition amongst banks as we approach tax year end. Inflation coming in slightly lower than expected might take the wind out of the savings sails a little into tax year end. Easy access products in particular are likely to remain under pressure for the remainder of the tax year.
The fact that the forecast also expects inflation to increase further to 3.7% should be positive for savers. But with two base rate cuts still expected, savers should still be taking advantage of some very attractive fixed rates, while they’re still beating inflation.
We will likely continue to see a normalisation of longer-term fixed deals paying higher rates than easy access or shorter fixes, so clients should take advantage of these if they can afford to lock money away.”
What this means for annuities
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown: “Inflation has fallen back this month – a shift that will bring sighs of relief for our bank balances. It’s a far cry from where we were two years ago when it hovered around the 10% mark. We’ve had a rollercoaster ride in recent years and while it’s welcome to see inflation moving closer to the Bank of England’s target, we know how quickly things can change. Taking a long-term view is all important when it comes to planning your retirement income and is a key part of choosing an annuity. These have soared in popularity over the past couple of years with prices hitting all-time highs. However, given that once bought an annuity cannot be unwound it pays to scan the market to make sure you get the best deal.
The latest data from HL’s annuity search engine shows a 65-year-old with a £100,000 pension can get up to £7,626 from a single life level annuity. Such an income may prove tempting but it’s worth saying that a level annuity’s income doesn’t change over time and so what might look like a great option now might feel less so if inflation takes another upward turn. The issue is that starting incomes from an inflation linked product start off much lower - one escalating at 3% currently delivers £5,480 per year – over £2,000 per year lower than a level product. It will however, rise over time so could prove a useful option.
Other strategies to inflation proof your retirement income could be to keep a part, or all of your pension in income drawdown where it remains invested and can grow. This can be used instead of, or in addition to, an annuity to keep an income that matches prices over the long-term.”
What this means for mortgages
Sarah Coles: “Mortgage rates have been easing off in recent weeks, with the average two-year fixed rate mortgage falling from 5.42% a month ago, to 5.33% (Moneyfacts). Inflation coming in slightly lower than expected could strengthen this trend. If you’re looking for a remortgage, this is really positive news, but there’s no getting away from the fact that you’re still going to be remortgaging onto a higher rate than your current one. It’s going to hit higher earners with bigger mortgages the hardest. The HL Savings & Resilience Barometer shows that the average monthly mortgage payment for the top fifth of earners is already £1,065, so remortgaging onto a higher rate could be particularly painful.”
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