Inflation drops more than expected ahead of Chancellor's Spring Statement - but economist warns of 'false dawn'
26 March 2025, 07:04 | Updated: 26 March 2025, 07:29
Inflation has dropped lower than expected to 2.8% in February, in figures released ahead of the Chancellor's Spring Statement on Wednesday.
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The rate of Consumer Prices Index inflation had been at 3% in January. Economists had expected the rate to come down to 2.9% in February, or remain flat.
Inflation remains ahead of the Bank of England's target of 2%. The rate jumped from 2.5% in December. The Bank expects inflation to reach 3.7% in the third quarter of this year, largely due to energy prices.
The slight decrease will be seen as good news for Rachel Reeves, as she makes her Spring Statement on the economy later - although one economist said the drop was "a false dawn".
The Chancellor said after the figures were released: "Security for working people and renewal for our country.
"That is our mission. And in a changing world we will deliver.”
Much of the slower inflation was attributed to clothing by the Office for National Statistics, which compiles the figures.
This was partially offset by increases in alcohol prices.
Suren Thiru, Economics Director at the Institute of Chartered Accountants of England and Wales, said February’s inflation slowdown was "a false dawn"
"Notable near-term price rises are already baked in, with next month’s jump in energy bills and national insurance likely to push inflation perilously close to 4% sooner rather than later," he added.
"Stubbornly high services inflation will aggravate fears that underlying price pressures in the economy have not yet been brought to heel, particularly given the likely upward momentum from April’s national living wage increase."
During her Spring Statement at lunchtime today, Reeves will acknowledge she needs to go "further and faster to kickstart growth", amid dour predictions about her cost-cutting measures and as she scrambles for savings to help balance the nation's books without hiking taxes.
The Chancellor will be forced to take action to stick to her rule of meeting day-to-day spending through tax receipts, rather than extra borrowing, in response to gloomy forecasts from the budget watchdog.
The Office for Budget Responsibility (OBR) is widely expected to slash its forecast for economic growth, following similar recent revisions by the Bank of England and the Organisation for Economic Co-operation and Development (OECD).
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And the watchdog is said to have warned that cuts to welfare set out in recent weeks have fallen short of the £5 billion savings ministers expected, according to media reports, leaving the Chancellor with a £1.6 billion hole likely to be filled with further cuts.
The government has also borrowed more than previously expected, with the cost of those loans rising - in part due to global turbulence.
In her spring statement, the Chancellor will tell MPs that a "more insecure world" requires a greater focus on national security, with a promise to increase defence spending by £2.2 billion from April as part of the previously announced plan for the biggest boost in military funding since the Cold War.
She will say: "This moment demands an active government stepping up to secure Britain's future. A government on the side of working people.
"To grasp the opportunities that we now have and help Britain reach its full potential, we need to go further and faster to kickstart growth, protect national security and make people better off through our plan for change."
Ms Reeves will tell MPs she is "proud" of her record in office - despite the sluggish economic growth figures which have heaped pressure on her.
In its October forecast, the OBR expected gross domestic product - a measure of the economy's size - to grow by 2% in 2025 and 1.8% in 2026 but that is widely expected to be downgraded.
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The Bank of England halved its growth forecast for the UK economy in 2025 to 0.75% in February, and earlier this month the OECD cut its 2025 forecast from 1.7% to 1.4%.
Lower-than-expected growth will lead to smaller tax receipts than had previously been budgeted for.
The latest official borrowing figures, for February, were £4.2 billion higher than had been forecast by the OBR.
Ms Reeves' self-imposed rule to meet day-to-day spending at the end of the five-year forecast through receipts rather than borrowing was forecast to be met with £9.9 billion of headroom to spare in the OBR's October assessment.
But the lack of growth and the increased cost of borrowing will eat into that headroom, forcing the Chancellor to take action to ensure she continues to meet the rule - which is designed to show that Labour can be trusted with the public finances.
