Britain’s inflation rate unexpectedly falls to 0.4% in February

Clothing, shoes and second-hand car prices drop as lockdown keeps non-essential retailers closed

A view of Guildford High Street in Surrey, England. The widespread drop in demand for clothes, partly caused by the closure of non-essential shops during the lockdown, left clothing prices 5.7 per cent lower than 12 months earlier. ReutersShow less

Britain’s inflation unexpectedly fell to 0.4 per cent in February after the cost of clothes and second-hand cars plummeted.

Consumer price inflation was down from 0.7 per cent in January, despite a rise in the cost of petrol and diesel, the Office for National Statistics said.

The data surprised economists who expected a February reading of 0.8 per cent.

“A fall in clothing prices helped to ease inflation in February, traditionally a month where we would see these prices rise, but the impact of the pandemic has disrupted standard seasonal patterns. Elsewhere, there were falls in the price of second-hand cars,” said Jonathan Athow, a statistician at the ONS.

”However, prices at the pump rose this month, compared with a fall this time last year.”

The third lockdown in England has left retailers with excess stock causing clothing and footwear prices to fall over January and February for the first time since 2007.

The widespread drop in demand, caused in part by the closure of non-essential shops during the lockdown, left prices 5.7 per cent lower than 12 months earlier – the biggest annual decline in 12 years.

Women’s shoes took are about one tenth cheaper than a year ago, the ONS said.

“February normally records higher prices in clothing and footwear category as January sales unwind, but this year the impact of the ongoing lockdown reversed this pattern, playing a big part in the fall in inflation in February,” said Janine Boshoff, an economist at the National Institute of Economic and Social Research.

Children's toys, such as dolls and scooters, as well as computer games, were also cheaper, the ONS said, while second-hand car prices, which rose last year when people avoided public transport at the start of the pandemic, fell 1.8 per cent.

Meanwhile, petrol prices rose 2.9 per cent and the cost of factories' raw materials were 2.6 per cent higher than 12 months ago, though this was not enough to offset the overall downward pressure on prices.

However, economists do not expect the dip in inflation to last long, with the February drop considered a short-term effect.

”Inflation is expected to reflect some volatility in the short term as the effect of ongoing lockdown impacts consumer prices in the non-essential retail market,” Ms Boshoff said.

The Bank of England expects inflation to rise sharply towards its 2 per cent target in the first half of this year, reflecting higher oil prices, as well as increases in regulated household energy bills.

Paul Dales, UK economist at Capital Economics, said the drag on CPI inflation in February from the lockdown would delay the rebound in inflation to 2 per cent.

"The fading of the drag from lockdowns and a rebound in energy inflation will probably lift inflation above 1 per cent in April, above 1.5 per cent by the summer and above 2 per cent by the end of the year," he said.

"That said, we doubt inflation will be persistently above 2 per cent until 2023, so don’t expect interest rate hikes for a long time yet.

The BoE's chief economist Andy Haldane said last month there could be a higher-than-expected rise in UK inflation, warning fellow central bankers against being too relaxed about taming increasing consumer prices.

Earlier this month, the ONS unveiled new additions to the virtual shopping basket it uses to measure CPI with hand sanitiser, dumbbells and loungewear.

Separately, the flash IHS Markit/CIPS UK Composite Purchasing Managers' Index rose to a seven-month high of 56.6 in March from 49.6 in February, following a rush of new orders in anticipation of easing Covid-19 lockdown restrictions.

"The surge in business activity is far stronger than any economists expected ... and hints at only a modest contraction of gross domestic product during the first quarter," said Chris Williamson, chief business economist at IHS Markit.

Meanwhile, the UK's House Price Index for January showed prices have fallen by 0.6 per cent since December.

However, prices are still 7.5 per cent higher than a year ago, taking the average property value to £266,532.