Inflation slides to lowest level for a year

(c) Sky News 2018: <a href="http://news.sky.com/story/inflation-slides-to-lowest-level-for-a-year-11336229">Inflation slides to lowest level for a year</a>
 

Inflation has fallen unexpectedly to its lowest level for a year, easing pressure on the Bank of England to raise interest rates.

The Office for National Statistics (ONS) said the Consumer Price Index rate of inflation declined to 2.5% in March from 2.7% in February.

Most economists had expected inflation to remain unchanged.

"Inflation fell to its lowest rate in a year, with women's clothing prices rising slower than usual for this time of year," said Mike Hardie, head of inflation at the ONS.

"Alcohol and tobacco also helped ease inflation pressures, with tobacco duty rises linked to the Budget not appearing this March, thanks to its new autumn billing.

"Growth in the price of goods leaving factories continued to slow, due mainly to a smaller increase in the price of food products compared with this time last year."

Inflation had risen to 3% following Britain's vote to leave the European Union as the pound slumped, pushing up the cost of imports.

Market watchers think the Bank of England is likely to raise interest rates to 0.75% next month to slow inflation, which is above its 2% target.

Sterling fell by a cent to 1.42 against the dollar - having reached a post-referendum high of $1.44 earlier this week - as the latest inflation data cast doubt on those expectations.

"Traders had been betting on an interest rate rise next month from the Bank of England," said Ben Brettell, senior economist at Hargreaves Lansdown (Frankfurt: DMB.F - news) .

"And while this still looks the most likely outcome, the absence of inflationary pressure lessens the onus on the Bank to act immediately."

With (Other OTC: WWTH - news) wages rising to 2.8% in the three months to February and unemployment falling, inflation could head higher and many experts still think the Bank is likely to raise rates now to counter that.

"Higher wages mean more money chasing the same amount of goods and services, which could lead to higher prices," Mr Brettell said.

"At the same time firms might choose to pass on higher staff costs to the end consumer.

"It's this wage-price spiral which underlines the case for higher interest rates. Remember the Bank of England is targeting inflation in two years' time, not today.

"At the same time, the Bank would dearly love some more firepower to counter the next economic downturn, whenever that may be.

"Higher rates now will mean scope for a loosening of policy should the economy take a turn for the worse."