UK inflation better than expected after falling to 2.8% in February

Despite falling, the rate of inflation is still higher than it was in December.

The rate of UK inflation dropped to 2.8% in February, according to today’s announcement from the Office for National Statistics (ONS).

The ONS accounts for the prices of various everyday items when calculating inflation. Put simply, this means products costing £1 in March 2024 have increased over the year by 2.8 pence.

It marks a dramatic change following the significant rise from 2.5% to 3.0% in January and brings inflation closer to the Bank of England’s 2% target.

This may come as welcome news, especially as experts expected inflation to fall by a smaller margin, and could prompt the Bank of England to resume cuts to the base rate after holding it at 4.50%.

However, with expectations that inflation will still hit 3.7% later in the year, this month’s figures could prove to be a temporary reprieve.

What’s behind inflation?

A fall in clothing and footwear prices served as one of the main driving forces behind this month’s dip in inflation. Costs dropped by 0.6% in the year to February, a stark contrast to the 1.8% annual rise observed the month prior, and the first time the annual rate in the sector fell since October 2021. This was attributed to falling costs in both women’s and children’s clothing, despite prices typically rising at this time of year as spring product ranges enter the market.

Recreation and Culture was another sector where price hikes slowed this month; costs rose annually by 3.4% compared to 3.8% in the year to January. Though prices for data processing rose, this was ultimately outweighed by downward effects seen in areas such as live music admission costs and recording media.

How does this affect savers?

Top rate reductions are prevalent, alongside a mixture of increases and a few holding firm, albeit with a slew of providers now taking market-leading positions.

In the aftermath of last month’s base rate reduction, easy access rates ISAs have won out against reductions and have improved over the past month. The leading easy access ISA has risen by 0.28% and, although this could be attributed to the upcoming tax-year end, it is a positive sign for savers who need a bit more flexibility with their cash.

The incentive of locking into a short-term fixed bond is lessening as the gap between the top one-year and five-year is just 0.03%. Savers expecting their five-year fixed bond to mature soon will be glad to see that current rates offer over double those that were available in March 2020. If they wish to maximise their savings potential, locking in for another five years may be an attractive choice, especially as uncertainty surrounding base rate reductions continues.

With less than a fortnight to go until the new tax-year, providers would typically be improving their rates to boost competition. Savers now only have a limited time to utilise their remaining ISA allowance.

The cash ISA limit will not be reduced to £4,000 in today’s upcoming Spring Statement, avoiding a major hit to savers. As inflation stands above the 2% target, easy access cash ISAs are losing money in real terms on average, but this should not deter savers from shopping around for better deals. Any future ISA reforms to encourage UK growth must avoid any undue risks that could discourage saving.