After a hotter-than-expected UK CPI print in January, inflation data in February came in below expectations as it reversed the rise seen in the previous month. The headline CPI index was up 0.4% MoM and 2.8% YoY in February, dropping from 3.0% YoY in January and under consensus projections of a 2.9% YoY increase. This is good news for the Bank of England which was put in a tough spot after inflation had surprised them to start the new year.

CPI

The all items CPI index increased 0.4% MoM and 2.8% YoY in February which meant that both rates were below the consensus forecasts of 0.5% MoM and 2.9% YoY. The headline annual rate was also a -0.2 ppts decline from the January rate of 3.0% YoY which was a surprise increase of 0.5 ppts over the December rate of 2.5% YoY. While there was some disinflation in February, the monthly rate was the highest since October 2024 and, before that, the highest since March 2024. However, it was the smallest MoM increase in a February since 2021.

Energy and food both put upward pressure on the main CPI inflation rates as those segments posted moderate gains on the month:

• Energy was up 0.7% MoM in February, but on an annual basis, was still a deflationary component at -6.8% YoY. The segment tracking liquid & vehicle fuels increased 1.4% MoM alone while electricity & gas costs were mostly unchanged in February. Both are negative on an annual basis. Energy prices are expected to continue to rebound in the first half of the year and are expected to put upward pressure on the headline inflation rate in the next few months.
• The food, alcoholic beverages, and tobacco index increased 0.4% MoM in February, after the strong 1.1% MoM increase in January.. The segments within this index saw increases at or below the headline MoM rate with the exception of alcoholic beverages & tobacco which increased 1.0% MoM. On an annual basis, food, alcohol, and tobacco is up 3.9% YoY, the highest increase since April 2024. Steady gains in food, alcohol, and tobacco prices are also becoming a significant source of inflation pressure, especially alcohol and tobacco prices which are up 5.7% YoY (Duty on non-draught alcohol increased from 1 February 2025 as announced in the Autumn Budget 2024).

Core CPI

The UK’s core CPI inflation rates exclude energy, food, alcohol, and tobacco. In February, Core CPI was up 0.4% MoM and 3.5% YoY, and like the headline rate, was below expectations of 0.5% MoM and 3.6% YoY gains. The February annual rate is a slight deceleration from the 3,7% YoY rate reported in January, which was a notable acceleration from the 3.2% YoY rate in December. Core inflation was pushed up by both goods and services prices which increased 0.4% MoM and 0.5% MoM respectively. Here are some notable details:

• Non-energy industrial goods prices were up 0.3% MoM in February, a slight rebound from the -1.0% MoM decline in the previous month. Most of the gains for the month came from housing goods (+1.0% MoM) and household goods (+1.1% MoM). Other goods indexes were cooler and offset the high monthly rates in those categories: clothing (-0.3% MoM), utilities (-0.2% MoM), and other recreational goods (-0.5% MoM).
• The index for all services was up 0.5% MoM and continues to be the main source of price pressures for consumers. Two services segments posted monthly gains above the headline rate, travel & transport (+1.1% MoM) and recreational & personal services (+0.8% MoM). These were offset by softer gains in housing services (+0.3% MoM), communication (+0.2% MoM), and misc. & other services (+0.2% MoM).
• Looking at annual trends, services inflation is still elevated at 5.0% YoY while goods inflation is at a much lower 0.6% YoY. Even when excluding the deflationary energy segment from goods, prices are only up 1.1% YoY. The heavily weighted recreational & personal services index has come down considerably in the last two years but still sits at an elevated 3.8% YoY (down from 3.9% YoY in January).

• Inflation in housing costs is still a major issue for consumers. The index tracking rent is up 7.4% YoY and has been above 7% since May 2024. Owner occupier costs rose by 7.5% YoY in February, down from 8.0% YoY in January. The January figure was unchanged from December 2024, and together they were the joint-highest observed since February 1992, when the rate was 8.6% YoY in the constructed historical series.