Consumer price inflation fell from an annual 3.5% in January to 3.0% in February but this is unlikely to mark the beginning of a sustained decline to about 1% by early 2011, as forecast by the Bank of England in the February Inflation Report.

A return to 3% was predicted in a post last month and reflected a fall in food and energy inflation together with a large monthly rise in "core" prices in February 2009 dropping out of the annual comparison. A further decline, however, is unlikely near term: monthly core price increases were low over March-June 2009 while energy inflation should rebound as a result of higher petrol prices and cuts in household bills last spring falling out of the calculation.

Assuming no significant impact from Budget decisions, CPI inflation is projected to fluctuate in a 3.0-3.25% range until mid-year before declining modestly during the second half, remaining well above the 2% target.

Services inflation has exerted downward pressure on the headline rate over the past year, falling from an annual 4.6% in December 2008 to 3.0% in February. The decline, however, may be coming to an end as the economy recovers: the balance of consumer services companies planning to raise prices has increased sharply, according to the first-quarter CBI / Grant Thornton survey released earlier this month – see first chart.

Goods inflation excluding food and energy, meanwhile, eased from an annual 3.3% to 2.6% in February but will be underpinned by recent exchange rate weakness and pass-through of surging raw material costs – sterling commodity prices, as measured by the Journal of Commerce industrials index, are two-thirds higher than a year ago. The balance of CBI manufacturing firms planning to hike prices rose to an 18-month high in March and is above its long-run average – second chart.

The February headline rate of 3.0% compares with the Bank of England's forecast a year ago that inflation would average 1.3% in the first quarter of 2010. The Bank has failed to provide a coherent explanation for its forecasting miss and markets appear to be increasingly sceptical of its inflation-fighting commitment, judging from a widening yield gap between conventional and index-linked gilts – third chart.