Prices were again on the weak side of the market consensus in February. A 0.6 percent monthly rise was 0.1 percentage point less than expected and small enough to reduce the headline annual inflation rate from 4.0 percent to 3.4 percent, its weakest reading since September 2021. Accordingly, the gap with its 2 percent medium-term target has now narrowed to 1.4 percentage points.

There was also better news on core prices which similarly increased 0.6 percent versus January, again undershooting the market call. This saw the underlying yearly inflation rate ease from 5.1 percent to 4.5 percent, its lowest reading since January 2022. Overall goods inflation declined from 1.8 percent to 1.1 percent while its services counterpart decreased from 6.5 percent to 6.1 percent, a 13-month low.

The main downward contribution to the change in the annual headline rate came from restaurants and hotels where the yearly rate fell from 7.0 percent to 6.0 percent. Clothing and footwear (5.0 percent after 5.6 percent) and miscellaneous goods and services (3.6 percent after 4.5 percent) also had a useful negative effect. On the upside the main pressure came from housing and household services (minus 1.7 percent after minus 2.1 percent) and transport (minus 0.1 percent after minus 0.3 percent).

The broad-based deceleration in inflation last month should go down well at the BoE. However, while it all but guarantees that the MPC's main dove, Swati Dhingra, will again vote for a 25 basis point cut, the majority will want to keep Bank Rate on hold. Trends are moving in the right direction but inflation in services and the core remain far too high. The UK's RPI now stands at minus 18 and the RPI-P at minus 9, both measures showing overall economic activity falling slightly behind market forecasts.

At 4.0 percent versus expectations for 4.2 percent, consumer prices in January, due to moderation in goods prices, were softer than expected though services prices climbed again. February's expectations are cooling to 3.6 percent.

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 price level 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.