Money blog: Inflation falls unexpectedly - as women's clothes the biggest driver (2025)

The dip in inflation could bring borrowers a boost, but it might not be a long-lasting one, mortgage brokers have said.

Several experts have pointed out that the fall to 2.8% could translate into lower interest rates and therefore better mortgage deals.

David Hollingworth, associate director at the UK's largest fee free broker L&C Mortgages, said: "Although a slight reduction in the rate of inflation had been expected, today's figures have outstripped expectation.

"That can have positive implications for mortgage rates if it helps to boost the market's outlook for interest rate movements."

As we explained in our previous post, markets are now expecting two interest rate reductions from May until the end of 2025.

But Hollingworth warned that today's news might not be enough to significantly shift mortgage rates.

"Rates have been much more stable recently, with most lenders making small improvements when they can. Although today's figures are positive, I don't expect to see a significant change to that pattern. Similarly, we'll hope that markets will give a calm reception to any inflation increases in the months to come," he said.

His thoughts were echoed by Ben Perks, managing director at Orchard Financial Advisers, who said: "That tiny little dip under 3% could have a butterfly effect on the mortgage rates available to borrowers.

"Don’t get too comfy, though, as we've seen inflation jiggle up and down over the past few years."

By James Sillars, business and economics reporter

With so much attention on Westminster today (it's the spring statement, in case you missed it), I want to take you over to the City of London for a moment.

Specifically, let's focus on Threadneedle Street where the Bank of England resides.

We've seen a shift in interest rate expectations after this morning's inflation data, which showed a slightly bigger easing than financial markets and economists had expected.

Ahead of the ONS figures, a small majority of market participants had expected no change to Bank rate when its rate-setting committee announces its next decision on 8 May.

Now, we see a small majority forecasting a cut.

Two reductions are now fully priced in from May and the end of 2025.

There are big potential threats lurking, however, around the prospects for interest rate cuts ahead.

The Bank fears businesses passing on budget tax hike costs that are due to come in from April.

There is also the possibility that Donald Trump follows through on his pledge of a big escalation in his trade war from next week, a scenario that also poses a big risk to the pace of price growth.

In short, it's too early to call what may happen in May.

While today's inflation figure was unexpected, the reaction from the shadow chancellor is not...

Mel Stride has said the rate, which is higher than the government's 2% target, is due to choices made by Rachel Reeves.

"Inflation remains higher than when Labour took office and the Bank of England expect it to rise over the coming year," he said.

"We left Labour with inflation bang on target. But since their no-strings-attached union payouts, record tax rises and borrowing splurge, they have pushed up the cost of living.

"The chancellor's choices have saddled the country with higher inflation for longer. Unless she takes urgent action at her emergency budget today, working families will continue to pay the price."

Reeves will appear in the House of Commons at 12.30pm to deliver her spring statement.

Full coverage will be in our Politics Hub- while here in Money we'll dig into how the chancellor's announcements will affect your wallet.

UK inflation has come in lower than expected at 2.8% in February - but how does that compare to other countries?

Our inflation rate is the same as the US, but it is significantly higher than our European counterparts.

France has managed to get it to 0.8% in February, down from 1.7% in January.

In the Eurozone, which covers all 20 countries in the European Union, the rate is more similar at 2.3%, down from 2.5% in January.

While the chancellor hasn't commented on the latest inflation figures (her focus will undoubtedly be on her spring statement this afternoon), we have had a response from the Treasury's chief secretary.

Darren Jones says the government's "number one mission" is kickstarting the economy and raising living standards.

"That is why we are protecting working people's payslips from higher taxes," he says.

"In a changing world, we're focused on delivering economic stability to secure people's finances - freezing fuel duty, protecting the triple lock and increasing the national living wage by £1,400 a year for full-time workers, while going further and faster to drive growth through our plan for change."

A fall in clothing prices had the biggest impact on inflation in February, Office for National Statistics data shows.

ONS chief economist Grant Fitzner says: "Inflation eased in February. Clothing prices, particularly for women's clothes, were the biggest driver for this month's fall.

"This was only partially offset by small increases, for example, from alcoholic drinks."

Other sectors that helped drive the decline were recreation and culture, housing and household services and furniture.

But their impact was dampened by rising prices of restaurants, hotels, transport, alcohol and cigarettes.

Rob Wood, chief UK economist at Pantheon Economics, said the fall in clothes prices was unusual and had not been seen since 2021 when the economy was feeling the impact of the pandemic.

Here's what else he found:

• The bounceback in furniture prices after January discounting was weaker than expected, with prices rising only 1.7% month-to-month, well below the average February gain of 3.1% in 2010s.
• "Notoriously erratic" games, toys and hobbies dragged on inflation.
• Used car price inflation accelerated largely as expected.
• Catering services prices jumped as Wetherspoon’s unwound its annual sales.
• Communication inflation was boosted by a base effect from a sharp fall in mobile phone application prices last February.

"Looking ahead, February was the calm before the storm of annual price resets, government-set price hikes and tax rises boost headline CPI inflation to 3.5% in April and then to a peak of 3.7% in September, in our view," he added.

Some good news for the chancellor, as inflation comes down at a faster rate than expected, says our business correspondent Gurpreet Narwan.

"We thought it would come in at 2.9%," she says.

"But I think what is more significant is where it goes from here, because it has been quite volatile in recent months."

Policymakers expect inflation to peak at 3.7%, before coming back down - but that's not a given.

"There are some fears that it could prove sticky, that there might be something called second-round effects, which is where inflation becomes embedded in the economy," she adds.

"And then people ask for more pay rises, and that leads to more inflation."

Over the past few months, inflation "hasn't come in as we've been forecasting, it's come in higher", she says.

And there have been other forecasts that have moved against her as well.

"Growth is coming lower than expected because inflation has been higher than expected," she says.

"Interest rates have been higher than expected.

"And that's the backdrop today to this spring statement - a headache for the chancellor."

Inflation has fallen further than anticipated to 2.8%, the latest data from the Office for National Statistics shows.

Most analysts had predicted a fall to 2.9% in February, down from January's 3%.

Remember, this doesn't mean that prices are falling, it just means they are rising at a slightly slower rate.

Signs of easing inflation will come as good news to Chancellor Rachel Reeves, who will deliver her spring statement at 12.30pm.

She has been focused on bringing down the cost of living and growing the UK economy, but the latest data has shown the economy has shrunk.

The Office for Budget Responsibility is widely expected to slash its forecast for economic growth later today, following similar recent revisions by the Bank of England and the Organisation for Economic Co-operation and Development.

We will be getting the latest inflation data at 7am, but before we do here's a quick reminder of what it is and why you should care about it...

Basically, inflation is the rate at which prices are rising.

It stands at 3%, with markets expecting that figure to fall to 2.9% this morning.

Inflation directly affects our overall cost of living and, if wages are not increasing at the same pace, the value of your money decreases.

It is affected by lots of different factors, including global conflicts - with the Ukraine war having a huge impact on food and gas prices. Some argue Brexit has also had a negative effect.

In the UK, inflation is measured monthly - comparing how much prices are going up with the same time a year before.

The headline inflation figure, which you'll see a lot in the news, measures price rises across a range of products that we need in our daily lives.

The most commonly used inflation index is the Consumer Price Index - and the target for many Western governments is 2%.

One thing to note is that falling inflation doesn't mean prices are coming down - just that they're rising less quickly. You'd need a minus figure, or negative inflation, to see prices fall overall.

Why does inflation affect interest rates?

The Bank of England raises interest rates to try to slow spending and encourage saving - when this happens, prices/inflation tend to come down.

When inflation falls, interest rates tend to.

Potential winners and losers from high inflation

Overall, a high and volatile rate of inflation is widely considered to be damaging for the economy - but there are some people who could benefit from it.

Workers with wage bargaining power (perhaps those who belong to strong trade unions) can come off better as they can protect their incomes by bidding for higher wages.

Producers could end up benefitting if their prices rise quicker than their costs.

People with stocks or property could also see the value of their assets rise if there is a sustained period of price inflation.

However, retired people on fixed incomes are likely to be worse off as inflation cuts the real value of their pensions and other savings.

The poorest will also feel the pinch more as costs of borrowing, food and domestic utilities are high.

For this week's guide, Anna Bowes, savings expert fromThe Private Office,looks at cash ISAs and reminds us all of an important deadline...

Millions of us have been squirrelling away savings into a cash ISA ahead of the chancellor's spring statement today.

Rumours that Rachel Reeves was going to cut the tax-free cash ISA limit - which she has since confirmed will not be happening today - pushed people to make the most of the £20,000 cap.

And, if you haven't done the same, there is still time to do so.

"If you haven't maxed out your ISA allowance yet, now's the time to act," Bowes says.

"There are less than two weeks left to use this year's allowance, and once it's gone, it's gone. And why not get ahead by using next year's allowance as soon as possible? The sooner you do, the more tax-free interest you can earn," she adds.

She explains that millions of people are being dragged into paying more tax due to frozen personal tax allowances and higher interest rates - so it's good news that the cash ISA limit isn't about to change.

Back in March 2021, Rishi Sunak, the chancellor at the time, announced that many personal tax allowances would be frozen until the 2025/26 tax year.

Bowes says: "That freeze was later extended to 2027/28, meaning even more people have found themselves paying income tax for the first time, or tax at a higher level."

The personal allowance, which is the amount you can earn before paying income tax, has been stuck at £12,570 since April 2021.

The thresholds for the basic, higher and additional rate taxes have also been frozen.

According to the Office for Budget Responsibility, by 2028/29, these frozen thresholds will mean nearly four million more people paying income tax, three million more moving into the higher rate bracket, and 400,000 more pushed into the additional rate. This process is known as fiscal drag - and it's a term you're likely to hear again today after the spring statement.

"Savers are feeling the impact too. The Personal Savings Allowance (PSA) has been frozen since it was introduced in 2016, meaning that as savings interest rates rise, more and more people are fully utilising their PSA with smaller deposits," Bowes adds.

"While basic-rate taxpayers can earn £1,000 of interest tax-free, higher-rate taxpayers only get £500, and additional-rate taxpayers get nothing. With higher interest rates over recent years and more people facing the 40% and 45% tax rates, many savers are now facing unexpected tax bills on their savings.

"This is why ISAs remain such a valuable tool. Any interest earned within an ISA stays completely tax-free, regardless of the amount, making them a great way to shelter your savings from the taxman."

Here are the top easy access cash ISAs on the market...

And the top paying fixed term cash ISAs...