Inflation remained at 3 per cent in February, according to the latest figures from the Office for National Statistics.
Many economists had expected the hold but have warned the respite is unlikely to last as rising energy costs begin to filter through the economy.
As the Consumer Prices Index (CPI) measure was unchanged from January, it means inflation is still above the Bank of England’s 2 per cent target.
The steady reading reflects a snapshot of the economy before the recent surge in global energy prices, with analysts cautioning that the current plateau could prove short-lived.
Stephen Barber, professor of global affairs at the University of East London, said: “Today’s figures show inflation stable at 3 per cent reflecting the world as it was in February.
“Since then, conflict in the Middle East has caused energy prices to spike, meaning this downward trend will inevitably be reversed.”
Clothing made the largest upward contribution to the monthly change to inflation in February with motor fuel making the largest, offsetting, downward contribution.
Core CPI, which excludes volatile measures such as energy, food, alcohol and tobacco prices, rose to 3.2 per cent from 3.1 per cent, while services inflation fell from 4.4 to 4.3 per cent.
The Chancellor said in response to the figures: “In an uncertain world we have the right economic plan, taking a responsive and responsible approach to supporting working people in the national interest.
“We’re taking £150 off energy bills and providing targeted support for those facing higher heating oil costs. We’re also acting to protect people from unfair price rises if they occur, bring down food prices at the till, and cut red tape to boost long-term energy security.”
What will happen to inflation in the future?
While February’s data suggests inflation has stabilised, most economists believe it is now on course to rise again in the coming months.
The sharp increase in oil and gas prices since the escalation of tensions in Iran is expected to feed through quickly into petrol and diesel costs, and more gradually into household energy bills and the wider economy.
Higher wholesale energy costs are also likely to push up prices for goods and services, as businesses pass on at least part of the increase to consumers.
The Bank of England recently warned inflation was expected to be around 3 per cent in the period from April to June rather than 2.1 per cent, as it had predicted in February.
Capital Economics expects inflation to rise in the coming months, warning it could peak at around 4.5 per cent later this year.
Meanwhile Pantheon Macroeconomics predicted a high of around 3.8 per cent in September.
Others suggest a slightly lower peak, but there is broad agreement that inflation will rise through the summer, creating what some analysts describe as a second hump after last year’s decline.
Much will depend on how long the current conflict lasts and whether the government steps in to shield households from rising energy costs.
What does higher inflation mean for interest rates?
Persistently higher inflation reduces the likelihood of interest rate cuts in the near term and raises the possibility that borrowing costs could remain elevated for longer with expectations it could be hiked four times this year.
The Bank held interest rates at 3.75 per cent last week, as policymakers weighed signs of persistent inflation against a weakening growth outlook.
Should there be four 0.25 percentage point increases, this would bring the base rate to 4.75 per cent.
What does this mean for mortgages, savings and pensions?
Mortgages
Mortgage rates are closely linked to expectations for interest rates, meaning a renewed rise in inflation could keep borrowing costs higher for longer.
They are currently on an upward trajectory following the turmoil in the Middle East with some providers pulling all of their rates.
The average two year mortgage fix has risen from 4.83 per cent at the start of March to 5.51 per cent on Tuesday, according to Moneyfacts, after the conflict in the Middle East sent oil prices upwards and appeared to dash hopes of more base rate cuts this year.
Tracker and standard variable rate mortgages would be directly affected by any future changes in the Bank’s base rate.
Soaring mortgage rate hikes will also “slam the brakes” on home purchases and “seize up” the property market, experts told The i Paper.
Savings
For savers, inflation remaining above target continues to erode the real value of cash savings.
Although interest rates on savings accounts have improved in recent years, a rise in inflation would make it harder to find accounts that offer returns above the rate of price increases.
If the Bank keeps rates higher for longer, savings rates may also remain relatively competitive – though they could fall if expectations shift back towards future rate cuts.
Pensions
Inflation poses a longer-term challenge for pension savers, as it reduces the real value of retirement income.
Even modest increases in inflation can significantly erode purchasing power over time, particularly for those drawing a fixed income.
At the same time, higher inflation and interest rates can influence annuity rates and investment returns, creating a more complex picture for those approaching retirement.
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