UK inflation dropped to 3.4 per cent, hitting its lowest level in 2 1/2 years, aligning with the Bank of England's (BOE) path towards reducing interest rates later in the year, Bloomberg reported on Wednesday. According to data released on Wednesday, the Consumer Prices Index rose in February by 3.4 per cent, a decrease from the previous month's 4 per cent pace, falling below economists' predictions and BOE expectations. BOE Governor Andrew Bailey awaits further evidence of sustainable price pressure decrease before adjusting the benchmark lending rate, which is expected to remain at a 16-year high of 5.25 per cent for now, with the first cut likely in August, according to Bloomberg. The core measure, excluding energy, food, alcohol, and tobacco, fell as expected to 4.5 per cent, while inflation in the services sector decreased to 6.1 per cent, slightly less than expected. Despite the positive direction of inflation, challenges remain, with food prices and costs in restaurants and cafes exerting downward pressure, countered by upward pressure from motor fuel, housing, and household services. Moreover, the UK's inflation trajectory brings it closer to levels observed in the US and euro area, prompting preparations to ease monetary tightening post-pandemic. However, uncertainties persist, with April's inflation and wages data pivotal for BOE rate-setters considering rate cuts. Britain faced the highest inflation among G7 nations last year, driven by surging food and energy prices, although living standards are improving as wage growth outpaces inflation. Nonetheless, the economy's recovery from a technical recession triggered by high-interest rates and a cost-of-living crisis appears sluggish, posing challenges for Prime Minister Rishi Sunak ahead of the anticipated general election later this year. Investors have revised their expectations for rate reductions, now pricing in only two quarter-point cuts by the end of the year, compared to initial projections of 1.25 percentage points in cuts for 2024.
