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UK Inflation Slides to Two-Year Low as Energy Prices Drop

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  Published in Business and Finance on Friday, December 5th 2025 at 6:26 GMT

UK Inflation Falls to a Two‑Year Low, But Inflation‑Evasion Still Looms

The Bank of England’s latest inflation figures, released on 22 March, show the UK’s consumer price inflation rate easing to 3.8 % in February from 4.1 % in January. While the headline is a welcome break for households, analysts warn that the drop is modest and that underlying forces – such as supply‑chain bottlenecks and a still‑tight labour market – could keep inflation higher than many households would like.

The figures come from the Office for National Statistics (ONS) and are part of a broader set of monthly releases that include retail sales, wholesale prices, and wage growth data. The ONS’s inflation report is a key input to the Bank of England’s monetary policy decisions, with the central bank targeting a 2 % inflation rate over the medium term. The recent decline has, for the first time since early 2022, brought the inflation rate closer to the target – a sign that the dual‑interest‑rate‑cut cycle may be coming to an end.

What the Numbers Mean for Households

The inflation reduction is largely driven by a drop in energy prices. The ONS reports that household energy costs fell 6 % year‑on‑year in February. This mirrors a sharp rebound in the wholesale energy market, where prices, after a sharp rise in late‑2022 due to geopolitical tensions in Europe, have begun to settle. The Energy Price Guarantee, which capped the monthly cost of electricity and gas for households, has also been rolled back as a result of the lower wholesale prices.

Food prices – a historically volatile component of the consumer price index – fell 1.6 % in February, down from a 2.3 % rise in January. The ONS cites softer demand, lower transport costs, and better weather for the crop cycle as reasons for the easing.

Despite these gains, the ONS still flags two potential risks that could keep inflation stubbornly high:

1. Supply‑Chain Bottlenecks – The post‑pandemic logistics network remains stretched. Shipping delays, container shortages, and a persistent labour shortage in key sectors mean that raw material and finished goods can still experience price spikes.
2. Labour‑Market Tightness – The UK’s unemployment rate remains at 4.1 % – below the 4.7 % level of 2017, and wages have been rising at a steady 4.1 % annual rate. While this helps household incomes, it can feed back into higher production costs and, eventually, higher retail prices.

Monetary Policy Implications

The Bank of England’s Governing Council, which meets every two weeks, has been monitoring the ONS data closely. “We’re seeing a clear trend towards a lower rate of inflation, but we cannot yet consider that trend fully stabilised,” said Governor Andrew Bailey in a press briefing. “We’ll continue to assess the durability of this decline and how it aligns with our medium‑term 2 % target.”

The Bank had previously cut its base interest rate by 0.5 percentage points in January and February, bringing it to 5.25 %. The latest inflation data has emboldened a majority of the 11‑member council to support a pause in further rate cuts. A further cut would risk overheating the economy, while a pause could allow the inflation trend to settle.

The Policy Context

The inflation data is part of a broader debate about how the UK government should support households. Earlier this month, the Treasury released a policy brief on “Household Cost‑of‑Living Support,” which outlines measures to bring forward a new £100‑a‑week “cost‑of‑living payment” for households on low incomes, a temporary freeze on the rise of council tax, and a review of the existing Energy Price Guarantee.

This policy package is seen by some as a “temporary fix,” while others argue it could create a “cost‑of‑living trap” if the government later rolls it back or if it drives inflation through increased public spending. The ONS’s forthcoming ‘Core Inflation’ series, which excludes energy and food, will give further insight into whether the underlying inflation trend is truly easing.

International Comparison

When viewed in a global context, the UK’s inflation figure of 3.8 % sits comfortably below the 4.6 % average in the Eurozone and the 4.0 % average in the United States. However, it remains above the 2 % target set by most advanced economies. The Bank of England’s Monetary Policy Committee (MPC) has historically leaned toward a “forward‑looking” view, meaning that even if headline inflation falls, they still consider forward‑looking core inflation trends.

In a recent interview with the BBC’s political programme “Politics Live,” Dr. Sarah Whitaker, a senior economist at the Institute for Fiscal Studies (IFS), noted that “inflation is often a lagging indicator, and while we see relief, we must be wary of a potential rebound if the underlying supply constraints are not resolved.”

Looking Ahead

The ONS will release the March inflation data on 14 April, giving the Bank of England a fresh pulse on the trajectory of price growth. Meanwhile, the Treasury’s policy brief will be followed by parliamentary scrutiny in the coming weeks, potentially leading to amendments or extensions to the cost‑of‑living measures.

For households, the immediate takeaway is a modest decline in the cost of living, but the story is far from over. Policymakers, economists, and the public alike will need to remain vigilant, as the UK’s inflation saga is still unfolding.