UK inflation sinks to 3% - but discounts harder to find

Cheaper gas and computer games helped ensure inflation dropped further than expected in February.

Last Updated: 31 Aug 2010

The Consumer Price Index measure of inflation fell to 3.0% in February, the Office for National Statistics said today, down from 3.5% in January. That’s a bigger drop than expected, and lends weight to the Bank of England’s theory that the recent spike in inflation will be short-lived. On the other hand, this is still well above the Bank’s 2% target; 3% is more than most savings rates we’ve seen lately, and more than the wage hike most of us can expect this year (even with the Retail Price Index slightly higher, at 3.7%). So prices are probably still rising faster than our ability to pay them...

This time last year, inflation soared a whopping 0.9%. So what was behind last month’s sharp fall? Well, the ONS reckons ‘recreation and culture’ provided the biggest downward pressure – in particular, computer games and toys for pre-schoolers actually fell in price during the month, after rising this time last year (clearly we’re all too skint to buy presents for the kids these days). Lower gas bills also played a part, with the likes of British Gas (finally) cutting their bills, while household goods and booze also saw prices fall. That said, it sounds like retailers across the board are offering fewer discounts than they were this time last year, while the VAT increase has also pushed prices back up. So that stopped inflation falling even further.

This is the second month in a row inflation has come in below expectations, which will please the Bank of England (not to mention the Government): Mervyn King has previously insisted that inflation will fall back below his 2% target later this year, and this suggests he has a point. Even if commodity prices will probably keep rising, pushing prices up (as you’ll know if you’ve filled your car up lately), demand seems likely to remain pretty weak here in Blighty, especially if high unemployment keeps wages down and we all have to start counting our pennies to pay our ginormous tax bills. Although whether this will be enough to get inflation back below 2% remains to be seen.

One thing’s for sure: today’s figure basically rules out any interest rate hikes any time soon (since this is the Bank’s way of slowing down spending). So as long as inflation remains around this level, most of our savings are probably still losing value in real terms – and since most of us won’t get much of a pay rise this year, our disposable income won't go as far either. There’s a cheery pre-Budget thought.

In today's bulletin:

UK inflation sinks to 3% - but discounts harder to find
Gung-ho Google decides to take on China over censorship
VT Group succumbs to £1.3bn Babcock offer (reluctantly)
Editor's blog: Ex-parrot shows doctors keen to feather their nest
A Traveller's Tale: Tough Times in Dublin

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