Business

Falling food prices expected to keep inflation rate pegged

The falling price of a basket of groceries is expected to contribute to the cost of living remaining unchanged today

INFLATION is expected to be held at 0.3 per cent when official figures for February are published this morning, as falling food prices and cuts to energy bills keep a lid on the cost of living.

The Consumer Price Index (CPI) measure of inflation hit its highest rate for a year in January, helped by rises in the price of alcohol and clothing.

The increase marked the third month in a row CPI had grown, climbing from 0.2 per cent in December and 0.1 per cent the month before.

However, economists expect February's CPI reading to remain at 0.3 per cent - or even edge down to 0.2 per cent - after a report by the Britain Retail Consortium showed food prices made a year-on-year fall of 0.4 per cent last month.

Food prices have been dropping for more than a year, as the rise of German discounters Aldi and Lidl forces the Big Four grocers to slash their prices.

Meanwhile, the decision by energy giant E.ON's to cut the cost of gas by 5.1 per cent for two million customers last month will also have a downward impact on inflation, experts said.

Despite January's rise, inflation remains historically low, with the Bank of England predicting it to stay far below the Government's 2 per cent target for some time.

Sharply lower oil prices have put a dampener on inflation, leaving the central bank in no hurry to raise rates above 0.5 per cent - where they have remained for seven years.

The Bank voted to keep rates on hold again this month and warned that Britain's vote on its European Union membership could hit UK economic growth.

The decision to keep rates at 0.5 per cent comes after the Office for Budget Responsibility slashed its growth forecasts for the UK economy in Chancellor George Osborne's Budget.

It downgraded its forecast for gross domestic product (GDP) from 2.4 per cent to 2 per cent this year, from 2.5 per cent to 2.2 per cent in 2017, from 2.4 per cent to 2.1 per cent in 2018 and from 2.3 per cent to 2.1 per cent in both 2019 and 2020.

Experts at Oxford Economics said: "A backdrop of further falls in factory gate prices, subdued wage growth and February seeing the first of the Big Six energy companies implementing cuts in gas bills, there seems a good chance that annual CPI inflation held steady at 0.3 per cent."

However, chief UK and European economist at IHS Global Insight Howard Archer expects inflation to come in lower at 0.2 per cent, triggered by "a widening in the year-on-year drop in fuel prices as well as lower food prices."

He added that a key factor in the eurozone going inflation in January to deflation in February was the impact of lower unprocessed food prices.

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