Inflation stalls at 0.3% and public borrowing picture worsens

22nd March 2016

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UK inflation remained at 0.3% in February, as the Consumer Prices Index was held down by falling transport costs.

According to the Office for National Statistics, food prices saw the biggest rise, especially the cost of vegetables.

Some commentators had forecast a slight uptick to 0.4%.

There was further bad news for the UK economy today as new borrowing figures suggested that the Government is going to have to overspend by much more than expected in order to meet its commitments.

Ben Brettell, senior economist at Hargreaves Lansdown, says: “Today’s data release continues the trend of inflation being at or very close to zero, and confirms the complete absence of pressure on the Bank of England to lift interest rates.

“Policymakers will need to remain mindful of the risk that inflation overshoots the 2% target at some point down the line.

“However, the UK economy is battling a number of significant headwinds at present: Slowing global growth, the upcoming EU referendum, and deflation in the euro zone are creating considerable uncertainty, while wage growth appears much weaker than the peak we saw last summer.”

Brettell says that core inflation, which strips out volatile components like food and energy, is a better measure of the underlying inflationary pressures in the economy. It also remained flat at 1.2% in February.

He adds: “Domestic inflationary pressures remain notable by their absence. Ian McCafferty, the most hawkish member of the MPC recently withdrew his vote for higher interest rates, leaving the rate-setting committee unanimous in leaving rates unchanged.

“All in all I can’t see any reason to suggest the era of ultra-low interest rates will come to an end any time soon.

“Rhetoric from the Bank of England still suggests the next move will be upwards, but I wouldn’t rule out the prospect of a rate cut, or further quantitative easing if the picture worsens.”

Russ Mould, investment director at AJ Bell, says: “Chancellor of the Exchequer George Osborne is already under the cosh after the political fall-out from last week’s Budget continues to rattle the Government and he will not be able to draw any comfort from either of today’s inflation and public borrowing figures.

“A February year-on-year inflation figure of 0.3%, as measured by the consumer price index (CPI) is way below the Bank of England’s 2.0% target and suggests the UK economy is yet to accelerate much beyond stall speed.

“Falling transport, soft drink and food prices appear to be the main drags on the CPI measure, even as restaurant, hotel and education prices rise. There is little sign yet of the near-50% rebound in oil prices having any effect although this could start to make itself felt in the March data.”

Borrowing

Mould adds: “Meanwhile, the cumulative public sector borrowing requirement (PSBR) of £70.7 billion compares to Mr Osborne’s full-year target of £72.2 billion, so barring a remarkable drop in borrowing in March (from £7.3 billion last year) the Chancellor is going to overspend by more than expected.

“If the Government can draw any succour from today’s one-two punch it is that interest rates are unlikely to rise rapidly, even after 84 months at a record low 0.5%. This will at least ease the cost of servicing its borrowings and give consumers a chance to make the most of any oil price windfalls.”

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