British inflation slowed more than expected in February, bringing some relief to consumers ahead of a likely new pick-up in price growth and to finance minister Rachel Reeves before her budget update speech on Wednesday.
Consumer prices rose by 2.8% in annual terms in February after a 3.0% increase in January, the Office for National Statistics said, as clothing and footwear prices fell for the first time in more than three years.
Economists polled by Reuters had pointed to a reading of 2.9% in February while the Bank of England had expected 2.8% in a set of forecasts published in early February.
Sterling fell by more than a third of a cent against the U.S. dollar.
Two-year British government bond yields, which are sensitive to speculation about BoE interest rates, fell by almost seven basis points, on track for their biggest daily fall in almost two months.
Economists warned that rising energy prices will push inflation up again soon.
"February's slowdown is a false dawn as notable near-term price rises are already baked in, with next month's jump in energy bills and national insurance likely to push inflation perilously close to 4% sooner rather than later," Suren Thiru, Economics Director at accountancy body ICAEW, said.
RATE CUT CAUTION
He said the BoE would remain wary about price pressures.
"While a May policy loosening remains on the table, rate setters will want to gauge the effect of April’s major jump in business costs and any measures announced in the Spring Statement before proceeding with another rate cut," Thiru said.
But Luke Bartholomew, deputy chief economist at investment firm Aberdeen, said the BoE would probably take comfort from Wednesday's data.
"This report does not fundamentally change the outlook for inflation, but it should keep the path clear for another interest rate cut in May," Bartholomew said.
The central bank expects consumer price inflation to peak at 3.75% in the third quarter of this year - almost double its 2% target - driven mostly by higher energy costs and regulated tariffs for household utility bills and bus fares.
Last week, the BoE warned investors against assuming that borrowing costs would be cut quickly.
The Office for National Statistics said services inflation - closely watched by the BoE - held at an annual rate of 5.0%, against expectations for a fall to 4.9%. The central bank had expected it would rise to 5.1% in Wednesday's data.
James Smith, an ING economist, said the services inflation data represented a tentative sign that the government's increase in employer taxes from next month was having an impact on prices.
"It should still fall back in the second quarter, though, keeping the Bank of England on track for three further rate cuts this year," Smith said.
