According to the Office of National Statistics (ONS), the UK Consumer Prices Index (CPI) annual rate of inflation has fallen to 4 per cent, down from 4.4 per cent in February.
The unexpected fall reduces the possibility of the Bank of England hiking up interest rates to slow inflation.
The news was broadly welcomed by most economists and retailers.
Rising inflation is yet another factor threatening the country’s fragile course to economic recovery as it runs the gauntlet of increased living costs, low consumer morale, a contracted economy, and higher taxes.
“It should help to stave off a rate rise in May,” Philip Shaw, an economist at Investec, told Reuters. “But while this is welcome, this is just one battle in what will be a long tussle. It’s still possible inflation will rise to 5 per cent over the course of the year.”
“The Bank has kept its nerve and they deserve credit for that,” Business Secretary Vince Cable told Sky News. “They’ve kept interest rates low and that’s what the economy needs.”
The ONS attributed the lower-than-expected interest rate to lower food prices - with a record 40 per cent of items on the shelves in the major supermarkets discounted.
British Retail Consortium (BRC) Director General Stephen Robertson said in a statement: “These figures confirm shop prices are not the cause of inflation. They’re actually making the biggest contribution to bringing it down. Our own figures show shop price inflation has slowed to 2.4 per cent, well below CPI at 4.0 per cent and RPI at 5.3 per cent.
“Consumer demand is weak. In March sales were down more than at any time in the 16 years we’ve been measuring them. As fierce competition for the spending that is available intensifies, supermarket promotions and discounts slowed food inflation to its lowest since August 2009.
“Inflationary pressure is coming from price shocks including, VAT, commodity prices and the weak pound not from rising wages or consumer demand.”
Continued on next page The inflation figures published
The inflation figures published by the ONS vindicate the decision made last week by the Bank of England to hold interest rates at the record low of 0.5 per cent, kept low with the hopes of guiding the country out of the choppy waters of the global financial crisis.
For the first time since the crisis, the European Central Bank raised interest rates. The inflation rate in the eurozone is below that in Britain, which is still running at twice its target level of inflation.
The pound fell against the dollar by 1.5 cents immediately after the figures were published, with the market deciding the Bank of England was unlikely to raise rates as soon as many economists and analysts had predicted.
Fruit prices fell by 4.7 per cent, with bread and cereals dropping by a record 2.6 per cent compared with the same time last year. Falls in the price of air flights, games, and toys also helped to offset rises in energy costs and cars, said the ONS.
Some analysts warned that the latest figures may be only a temporary respite, and that inflation could begin to speed up again in the coming months.
“There is little cause for celebration as the inflation rate remains well above average and continues to exert significant pressure on household disposable income and discretionary spend,” Neil Saunders, consulting director at research group Verdict, told the BBC.
The Bank of England’s rationale for keeping interest rates low is that the inflation is being pushed up temporarily by the recent VAT hike and high commodity prices, and will fade naturally over time.
The ONS inflation figures were published on the same day that figures from the British Retail Consortium showed the biggest slump in retail sales since they started collecting data 17 years ago.
Stephen Robertson said: “Uncomfortably high inflation and low wage growth have produced the first year-on-year fall in disposable incomes for 30 years.” He said that rising fuel and utility costs together with falling house prices, higher VAT, and the prospect of more tax rises and job losses left people unwilling to spend unless they really had to. “These pressures aren’t going away and the arrival of higher National Insurance is likely to compound them in the immediate future,” he said.
Helen Dickinson, head of retail at KPMG, said in a statement: “We have seen an emergence of new, lower spending patterns since the middle of January, which are currently continuing to trend downwards. Many retailers will not be able to sustain this ongoing weakness in demand beyond the short term.”
