Inflation is tipped to fall back to its lowest level for nearly a year in a busy week for UK economic data, with hopes the drop will help accelerate the Bank of England’s rate-cutting cycle.
Economists are expecting the Office for National Statistics to show a sharp reprieve in the Consumer Price Index – the headline benchmark for price inflation – after overshooting estimates in December.
A Bloomberg poll of City analysts predicted inflation would hit three per cent – marking the lowest level since March 2025.
It comes after a dramatic surge in December led by food inflation hitting 4.5 per cent, compared to 4.2 per cent in the previous month. The measure is closely watched by Bank of England rate-setters given the cost of groceries can weigh heavily on inflation expectations.
The move was driven by sharp increases in the cost of coffee and sugar, which have been the target of “sin” taxes.
The price of sugar and confectionery has spiked the most over the past year, leading to food and drink inflation figures at 10.2 per cent. It comes after pre-packaged milkshakes and lattes were folded into the government’s new ‘sugar tax’ as it attempts to tackle obesity in the UK.
Ellie Henderson, Investec economist, said food price growth would likely to have fallen to 4.2 per cent but cautioned food inflation was still a “key concern”.
Inflation dip to still leave Bank divided
Whilst inflation is expected to fall, some hawks on the MPC are anticipated to hold their ground.
Bank of England chief economist Huw Pill said at an event with Santander on Friday that he believed rates were already “a little bit too low”, in a stark suggestion further decisions would continue to be a close call.
In its decision at the beginning of February, the Bank’s Monetary Policy Committee voted to hold rates at 3.75 per cent in a much-closer call than anticipated at a 5-4 split.
Bank governor Andrew Bailey signalled a dovish outlook despite voting for a hold, as he maintained that further cuts were set to come as price growth was set to fall to near the Bank’s target two per cent rate in April.
“We now think that inflation will fall back to two per cent by the spring,” Bailey said, with previous forecasts showing inflation only dropping to its target from 2027. “That’s good news.”
The latest inflation figures are pencilled in for Wednesday and will come after new unemployment figures on Tuesday. Borrowing data and retail sales will round the week off on Friday.
