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UK inflation shows surprise fall

Inflation fell unexpectedly in March as a supermarket price war led to a fall in the cost of food that outweighed higher housing and energy costs, the Office for National Statistics said.

The figures should reassure the Bank of England that inflation is not rising out of control and mean interest rates will not increase next month.
Annual consumer price inflation (CPI) fell to 4pc last month, the first decline since July last year. Analysts had expected the rate to hold steady at a 28-month high of 4.4pc reached in February.
"It should stave off a rate rise in May," said Philip Shaw, economist at Investec, who called the rise "a very welcome surprise".

CPI has been above the Bank of England's 2pc target since December 2009, and the central bank has warned that it may rise to 5pc this year.

Vicky Redwood, of Capital Economics, said: "Admittedly, this may be only a temporary respite, with recent rises in energy prices potentially pushing the headline rate higher in the coming months. Nonetheless, the fall in the core inflation rate from 3.4pc to 3.2pc is clearly reassuring - and perhaps suggests that retailers are reacting to the recent weakness on the high street."

Retail price inflation (RPI), which includes more housing costs and is the benchmark for many wage deals, slowed to 5.3pc from 5.5pc in February, the ONS said on Tuesday. It was expected to be unchanged.
A record monthly fall in food and drink prices, along with fall in the cost of air travel and recreation and culture were the biggest drivers behind the decrease in annual inflation between February and March.
“Prices have fallen this year due to sales at several supermarket chains,” the ONS said.

Fruit prices, overall, fell by 4.7pc, a high for a February to March period. Bread and cereal prices, overall, fell by 2.6pc, the largest ever monthly fall.

The main upward pressures over the month came from rising transport due to higher oil prices. Furniture, clothing and footwear costs also rose.

The Bank of England, which says most of the factors pushing up prices are only temporary, faces a tricky balancing act of taming inflation over the medium term without damaging a fragile recovery at a time of public spending cuts, tax rises and economic uncertainty.

Last week, the central bank opted to hold rates at a record low of 0.5pc, breaking step with the European Central Bank which raised the cost of borrowing for the first time since the 2008 financial crisis to curb inflation.

Sterling hit a five-and-a-half month low against the euro and a one-week low versus the dollar after the better-than-forecast inflation data dented the chances of an interest rate rise soon.
David Owen, of Jeffries International, said: "From the point of view of rates it's obvious they can't go in May. Given also the weakness apparent in the retailing figures, will they go in August, I don't think so."

The high street saw its biggest monthly fall in sales since 1995 last month as consumers reined in their spending.
Sales fell by 1.9pc, the largest monthly decline in the 16 years in which the British Retail Consortium (BRC) and KPMG have collated sales. Sales in every category bar footwear fell, including food, clothing and furniture.

Source : The Telegraph

12 April 2011
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