March 20, 2018 05:30 EDT

Consensus Actual Previous
Month over Month 0.5% 0.4% -0.5%
Year over Year 2.7% 2.7% 3.0%

Consumer prices were just slightly softer than expected in February. With base effects quite strongly negative (the CPI jumped an unusually large monthly 0.7 percent in February 2017), a 0.4 percent rise in prices versus January reduced the annual inflation rate from 3.0 percent to 2.7 percent. This was the lowest yearly rate since last July.

The main downward impact on the monthly change in annual inflation came from transport where a fall in petrol prices contrasted with a rise over the same period in 2017 to reduce the headline rate by almost 0.1 percentage points. Food and soft drinks, where prices edged just 0.1 percent higher after a 0.8 percent spike last year, also subtracted as did restaurants and hotels. The only significant, albeit partial offset, came from clothing and shoes where the seasonal advance in prices was less than in February 2017.

As a result, the core CPI increased 0.6, lowering its yearly rate from 2.7 percent to 2.4 percent, its weakest outturn since March 2017.

The slide in February inflation should reduce the chances of a surprise hike in official interest rates at the BoE's MPC meeting on Thursday. Indeed, the annual rate was 0.2 percentage points short of the central bank's latest forecast. However, the Bank clearly has a tightening bias and another rate hike in May remains very much on the cards. To this end, tomorrow's labour market report could be particularly significant.

Note that from next month publication of the CPI will move from Tuesday to Wednesday.

The consumer price index (CPI) is an average measure of the level of the prices of goods and services bought for the purpose of consumption by the vast majority of households in the UK. It is calculated using the same methodology developed by Eurostat, the European Union's statistical agency, for its harmonised index of consumer prices (HICP). The CPI is the Bank of England's target inflation measure.

The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as the UK, where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

For monetary policy, the Bank of England generally follows the annual change in the consumer price index which is calculated using the European Union's Eurostat methodology so that inflation can be compared across EU member states.