UK inflation has slipped back to 2.8%, providing Chancellor Rachel Reeves with some relief ahead of her spring statement.

Inflation as measured by the Consumer Prices Index had risen to 3% in January from 2.5% in December and last month’s figures was expected to come in at 2.9%.

The headline rate of inflation is well down from its 11% peak in the second half of 2022 and came in at 2% last summer, although it is forecast to rise to about 3.7% this year.

This is nearly twice the Bank of England’s 2% target and may restrict its opportunities for cuts to interest rates. Analysts still expect two more cuts this year.

Ms Reeves will today confirm measures to bring the public finances back under control as the economy stagnates and borrowing continues to rise.

The OBR, which will publish its latest economic and fiscal outlook, has said the welfare cuts will need to be deeper to meet her targets. The Department for Work and Pensions will publish an impact assessment into the government’s welfare reforms.

She is under pressure to lift sentiment among businesses which are reluctant to invest following her steep increase in costs that will come into effect next month.

The Government will increase spending on defence, putting advanced weaponry in the hands of British troops and provide better homes for military families, paid for by reductions to the international aid budget and from the Treasury reserve.  

The Chancellor, who will address MPs at about 12.30pm, will announce a further £2.2 billion funding increase for defence from April, as she warns that Britain has to “move quickly in a changing world”. 

New funding will be invested in advanced technologies so that Britain’s armed forces have the tools they need to compete and win in modern warfare. This includes guaranteeing the investment to fit Royal Navy ships with Directed Energy Weapons by 2027.

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Martin Sartorius, principal economist at the CBI, said: “Inflation remained firm in February, broadly in line with the Bank of England’s expectations.

“Looking ahead, price pressures are set to rise again in April, driven by higher energy costs, regulated price increases, and the passthrough of Autumn Budget measures.

“We continue to expect that the Monetary Policy Committee will cut interest rates at a quarterly pace over 2025, in line with its ‘gradual and careful’ forward guidance. This should help ease the strain of high borrowing costs on businesses and households.”

Luke Bartholomew, deputy chief economist, at Aberdeen Group, said: “Both the Bank of England and the Chancellor will be somewhat relieved by the drop in headline inflation.

“Though inflation is still running well ahead of target and is still likely to increase later this year. So this report does not fundamentally change the outlook for inflation, but it should keep the path clear for another interest rate cut in May.

“In the meantime, slightly lower inflation should also mean less pressure on gilt yields, which remain a major concern for the Chancellor.

“While the broad contours of that announcement are well understood, the market reaction will likely turn on how much the spending reductions are front-loaded versus back-loaded, with back-loaded cuts more likely to stretch credibility and risk a more adverse market move.”