UK inflation decreases to 3.4%, below forecasts.

• According to the Office for National Statistics, the largest downward contributions to the economy were seen in the food, restaurants and cafes sector, while the largest upward pressure came from the housing and fuel sectors.
• Zara Nokes, global market analyst at JPMorgan Asset Management, stated in an email Wednesday that the latest inflation print provides further evidence that the outlook for U.K. households is improving.

Official figures revealed that U.K. inflation in February was lower than anticipated at 3.4% year-on-year, a decrease from the 4% recorded in January.

The consumer price index increased by 0.6% month-on-month, moving back into positive territory after a -0.6% decline in January.

According to LSEG data, economists surveyed by Reuters predicted an annual rate of 3.5% for February and a monthly rate of 0.7%.

According to the Office for National Statistics, the largest downward contributions to the economy were seen in the food, restaurants and cafes sector, while the largest upward pressure came from the housing and fuel sectors.

The ONS announced that food and non-alcoholic beverage prices increased by 5% year-on-year in February, which was lower than the 7% increase in January and the lowest annual rate since January 2022.

The annual rate has decreased for the eleventh month in a row from a recent high of 19.2% in March 2023, which was the highest rate seen in over 45 years.

The closely monitored core CPI figure, which does not include fluctuating food, energy, alcohol, and tobacco prices, came in at an annual 4.5%, lower than a consensus forecast of 4.6% and lower than 5.1% in January.

In a statement following the Wednesday print, U.K. Finance Minister Jeremy Hunt stated that falling inflation "paves the way for improved economic conditions."

The Bank of England anticipates a temporary decrease in headline inflation to 2% in the second quarter, followed by an increase in interest rates later in the year to control prices, after raising them aggressively over the past two years.

The central bank will meet on Thursday to decide its next monetary policy move and is widely expected to maintain interest rates at 5.25% as it considers when to initiate cuts.

Zara Nokes, global market analyst at JPMorgan Asset Management, stated in an email Wednesday that the latest inflation print provides further evidence that the outlook for U.K. households is improving.

The central bank is likely to be unconvinced that "the battle against inflation is won," despite the headline figure suggesting otherwise.

Inflation is expected to decrease below the 2% target in the Spring, mainly due to a temporary decrease in energy prices, according to Nokes.

"The bank will closely monitor the medium-term inflation outlook, with a focus on the inflation generated domestically from the services sector."