The annual change in consumer prices fell to zero in February, prompting media headlines about “record low” inflation. A more correct statement is that CPI inflation is at a 25-year low, since official statistics do not extend back before 1989.

For a longer-term perspective, it is necessary to use the previously-targeted RPIX (retail prices excluding mortgage interest) measure*. The annual change in RPIX was 1.0% in February, matching a low reached in June 2009. Looking further back, RPIX inflation was below the current level in 1963, 1960, 1959 and 1954. So “record low” is incorrect even confining attention to post-WW2 history.

The current deviation of the annual CPI change from the 2% target is explicable by energy and food price weakness and sterling strength. “Core” inflation excluding energy, food, alcohol and tobacco was 1.2% in February, while sterling’s appreciation has probably lowered the core rate by at least 0.5 percentage points.

Services prices are a better guide to domestic inflationary pressures, since they are less affected by changes in commodity prices and the exchange rate (though not impervious**). Services inflation was stable at 2.4% in February versus a 2014 average of 2.5%.

Solid monetary trends continue to suggest that the next big move in domestically-generated inflation will be higher. The headline rate may rebound surprisingly strongly later in 2015 and in 2016 as the commodities / sterling drag unwinds.

*A recent paper by a former government economist disputes the official view that the CPI is statistically superior to the RPI / RPIX.
**Examples of effects include food costs on catering services, energy costs on transport services and the exchange rate on foreign holidays.