Business World

Wednesday 26 July 2017

UK inflation unexpectedly drops to 4pc

Inflation is still double the UK government's 2pc target. Photo: Getty Images
Inflation is still double the UK government's 2pc target. Photo: Getty Images

Inflation unexpectedly dropped last month, official figures showed today, weakening the prospect of an imminent interest rate hike by policymakers at the Bank of England.

The Consumer Prices Index (CPI) rate of inflation was 4pc in March, down from 4.4pc in February, but still double the UK government's 2pc target, the Office for National Statistics (ONS) said.

City analysts had expected the CPI rate to hold at 4.4pc.

The drop in the cost of living was driven by falling food prices, the ONS said, which slipped 1.4pc - the biggest month-on-month drop since between June and July 2007 - as supermarkets rolled out heavy discounts to draw in cautious consumers.

The improved figures will be welcomed by the Bank's Monetary Policy Committee (MPC) which has been under pressure to raise interest rates from their historic lows of 0.5pc as it battles with stubbornly-high inflation.

Last week, the MPC held interest rates for the 25th month in a row as it faced a challenging mix of soaring inflation and sluggish economic growth.

The UK economy went into a shock 0.5pc decline in the final quarter of 2010 and recent surveys of the services and manufacturing sectors have offered a mixed picture of the recovery.

The majority of MPC members believe the inflation surge is down to temporary price shocks and are minded to wait and see how well the economy fared in the first three months of 2011 before tightening monetary policy.

Today's figures will further alleviate pressure to raise interest rates imminently - even though the Bank itself has forecast inflation hitting 5pc in the coming months.

The most significant downward pressure between February and March came from the falling cost of food and non-alcoholic beverages, most notably fruit, bread and cereals.

Supermarkets were behind the plunge, the ONS said, as they slashed prices in the face of weakening consumer confidence.

Elsewhere, recreation and culture prices dropped by 0.4pc and the communication sector saw prices fall 0.2pc.

But there was still upward pressure on inflation last month as transport prices rose by 1.2pc between February and March.

The largest contribution came from fuels and lubricants - where pump prices rose 2.7pc to reach record levels of £1.32 for petrol and £1.38 for diesel.

The rising cost of oil is being pushed upwards by the conflict in Libya, where supply has been heavily restricted.

Elsewhere, furniture prices also put upward pressure on the CPI rate as they increased by 3.7pc last month.

Other measures of inflation also dropped. The headline rate of retail prices index (RPI) inflation, which includes mortgage costs, was 5.3pc in March, down from 5.5pc in February.

Elsewhere, an ONS report said January's rise in VAT from 17.5pc to 20pc added an estimated 0.76pc to the CPI rate of inflation in January, almost twice as much as the effect of last year's VAT rise.

Press Association

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