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UK inflation unexpectedly falls as clothes shops slash prices

·Senior City Correspondent, Yahoo Finance UK
·3-min read
A man walks past a further reductions sale sign, displayed outside JD Sports shop window in Macclesfield , England. Photo: Nathan Stirk/Getty Images
A man walks past a further reductions sale sign, displayed outside JD Sports shop window in Macclesfield , England. Photo: Nathan Stirk/Getty Images

UK inflation dropped unexpected in February, according to official data, as retailers slashed clothing and footwear prices to try and shift excess stock.

The Office for National Statistics (ONS) said annual consumer price inflation was 0.4% in February, falling from 0.7% in January. Economists had forecast a rise to 0.8%.

Falling prices for clothing, second-hand cars, and games acted as a downward drag on inflation last month, while fuel and housing costs rose.

The ONS said retailers continued to slash prices for clothing and footwear in February, rather than hiking prices after January sales as has happened in previous years.

"This results in a fall in clothing and footwear prices of 5.6% in the year to February 2021 – the largest fall since November 2009," the stats body said.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "The lockdown has left clothing retailers with considerable excess stock to shift. Clothing prices likely have rebounded this month, now that retailers have introduced new seasonal ranges."

WATCH: What is inflation and why is it important?

Inflation is a measure of the rate at which average prices are changing in an economy. It is calculated by monitoring an imaginary basket of goods that reflect common purchases — everything from trousers and food to energy costs.

The ONS said 69 items — or 8.3% of the basket — could not be measured in February as a result of lockdown restrictions. The stats body recently updated its basket to include pandemic-era items such as hand sanitiser and sweatpants.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) — a broader measure of price growth — slowed to 0.7% in February, down from 0.9% in January.

Ed Monk, associate director of personal onvesting at Fidelity International, said there was “a confusing picture on prices right now."

"Again, it’s sluggish clothing and footwear prices which have done most to drag the headline rate lower, but that’s in the context of lockdown when spending habits have shifted and retailers have had to adapt their discounting over the past 12 months," Monk said. "If restrictions are lifted and those effects fall away, a big brake on price rises will be released."

READ MORE: Banks curb fossil fuel lending but 'still heading in wrong direction'

Inflation is closely watched by investors and seen as a key component of economic growth. The Bank of England sets policy with a view to reaching 2% inflation.

Price growth weakened last year as the COVID-19 pandemic struck but economists expect inflation to rapidly pick up later this year as economies begin to unlock and stimulus money floods the market. The Bank of England last week said it expected inflation to "return swiftly to around the 2% target in the spring" as a result of rebounding oil and energy prices.

ING said February's below expectations inflation reading was "arguably only a blip". Tombs said: "We continue to think that the headline rate of CPI inflation will jump to within a whisker of the 2% target by May, before climbing a little further towards the end of this year."

Expectations of rising inflation have sparked a recent sell-off in government bonds as investors bet that rising prices will force central banks to raise interest rates sooner than expected.

“Investors should expect some volatility as rising inflation puts pressure on the bond market," Monk said.

The pound weakened against the dollar and euro in the wake of Wednesday's data. Sterling was down half a percent against the dollar to $1.3686 (GBPUSD=X) and down 0.2% against the euro to €1.1577 (GBPEUR=X).

WATCH: What is a budget deficit?