The Consumer Prices Index, which measures changes in the prices of the goods and services bought by households, was unchanged in the year to February 2015, down from 0.3% in the year to January.
While some prices (motor fuels and food) are lower than they were a year ago, others, such as for clothing and rents, are higher.
Prices of motor fuels and food have now fallen or remained unchanged on the year for 18 and 10 consecutive months respectively, and in February the 12-month rates for both groups were the lowest on record. Taken together, motor fuels and food price changes reduced the CPI 12-month rate by approximately 0.9 percentage points in the year to February.
The slowdown in the 12-month rate between January and February came from price movements for a range of recreational goods (particularly data processing equipment, books and games, toys and hobbies), food and furniture and furnishings.
The core inflation rate – the rate of inflation excluding goods with volatile price movements, notably energy, food, alcohol and tobacco – was 1.2% in February, 1.2 percentage points higher than overall inflation. As in most recent months, this indicates that most of the downward pull on inflation has come from price movements for goods excluded from the core calculation, notably motor fuel and food.
The fall in inflation is slightly more the 0.1% predition by economists, and there is now speculation that the Bank of England will defer a rate rise beyond previous expectations.
Adam Chester, Head of Economic Research & Market Strategy at Lloyds Bank Commercial Banking argues that the "drop has not been driven by weakness in the economy but by aggressive supermarket discounting, and the feed-through from lower oil prices to forecourt fuel prices". He added that inflation looks set to dip briefly into negative territory over the coming months.
During the latest Monetary Policy Committee meeting, the MPC discussed cutting Bank Rate further towards zero from its current level of 0.5%.
Last month, Mark Carney stated that the central bank’s projections show inflation dipping to zero in the second quarter of the year and remaining “close to zero” for most of the year.
An accompanying BoE report added that “it is now more likely than not that CPI inflation will dip briefly below zero at some point in the first half of 2015”.
Alan Cleary, Managing Director at Precise Mortgages commented that the level of inflation is "likely to lead to a cut in swap rates, which in turn may lead to cheaper fixed rate mortgages."
He added:
"Of course we we don't want stagnation as this would be damaging to the economy, so the Bank of England may have to lower interest rates to try and encourage consumers and businesses to spend rather than hoard cash."
Andrew Montlake, Director at Coreco Mortgage Brokers, comments:
“It has been widely expected for a while that inflation would hit 0 and even become negative in the next few months, as a fall in the costs of fuel and food pushes down prices. Whilst the Governor of the Bank of England remains calm that this will not lead to more serious deflation and the 2% target will be hit again in the medium term, there will undoubtedly be more pressure for the next move in Bank Base Rate to be a short-term cut rather than a rise.
“For the mortgage market this could mean we see a fall in the costs of fixed rates once more as SWAP rates edge down and it will be interesting to see if lenders do want to push the boundaries of fixed rate pricing to the lowest levels we saw a few weeks back or they are happy with the current pricing levels. Low rates will only go so far in attracting new business and for many there are more serious criteria issues to address first and foremost to open up the mortgage market further.”
Calum Bennie, savings expert at Scottish Friendly, added:
“The Bank of England may find themselves under increasing pressure to cut interest rates from their all-time low of 0.5 per cent. This is great news for borrowers, but places further pressure on cash savers across the country.
“The outlook for savers is not good and those looking to build up deposits will have to scurry around to get decent rates on cash accounts. Alternatively, for a long term investment, now could be the time for people to consider stocks and shares, or investment ISAs."
