UK inflation rate falls to 4% in March


Darren Morgan from the ONS said food prices had fallen a record amount between February and March

The UK Consumer Prices Index (CPI) annual rate of inflation has fallen to 4%, down from 4.4% in February.

The drop was largely due to a record monthly fall in the price of food and non-alcoholic drinks, which fell 1.4%, compared with a rise last year.

Retail Prices Index (RPI) inflation - which includes mortgage interest payments - fell to 5.3% from 5.5% in February.

The fall eases pressure on the Bank of England to raise interest rates.

CPI is now back to the level recorded in January.

The pound fell almost 1.5 cents against the dollar immediately after the figures were announced, to $1.6238, as investors decided the Bank was unlikely to raise rates as soon as they had previously thought.

Against the euro, it fell one cent to 1.1237 euros.

More discounts

The Office for National Statistics (ONS) said supermarkets had reduced their prices in March.

The British Retail Consortium (BRC) said increased competition at a time when consumers were spending less meant margins were being squeezed.

A record 40% of supermarket sales were now discounted or part of a promotional offer, it added.

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With households so squeezed, it's been a puzzle how firms could pass on all these input price increases month after month. Taken alongside the bad news coming from retailers, today's figures might, just might, suggest that consumers are starting to say no. ”

End Quote

Fruit prices fell by 4.7%, while bread and cereals dropped by a record 2.6% when compared with March last year, the ONS said.

Falls in the price of air flights, games and toys also helped to offset rises in energy costs and cars, it added.

However, analysts warned that the rate of inflation could begin to speed up again in the coming months.

The Bank itself expects the inflation rate to pick up for the remainder of this year, potentially rising as high as 5%, before falling back to its target rate of 2% by the end of next year.

Interest rates

Economists had expected the CPI rate to stay at 4.4% in March, or perhaps even rise slightly.

"It's not only a surprise, it's a very welcome surprise," said Philip Shaw at Investec.


Details from inflation calculator

But although lower than its expectations, inflation is still twice the Bank of England's target rate, and has now been one percentage point or more above target for 16 months.

This has led to calls for the Bank to raise interest rates - the policy tool used to combat rising prices.

"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," said Neil Saunders, consulting director at research group Verdict.

Last week, the Bank's Monetary Policy Committee (MPC) kept rates at a record low of 0.5% for the 25th month in a row.

Next week it will reveal how members voted.

Graph showing UK inflation rates
Members disagree

Three of the MPC members called for a rise in rates at last month's meeting.

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The prospect of a May rate hike has been significantly reduced by today's surprise drop in UK CPI”

End Quote James Knightley ING

They and some other economists have argued that rates must rise in order to combat rising prices, which are eroding consumers' spending power.

Those members that voted for rates to be held, backed by a number of leading economists and business groups, argue that a rise in rates could jeopardise the UK's fragile economic recovery, particularly in light of the economy's 0.5% contraction in the final three months of last year.

They say that inflation is high due to temporary and external factors, such as the recent rise in VAT and high commodity prices, and has yet to be reflected in wage increases, which would provide longer-term upward pressure on prices.

The rise in VAT came into effect in January, and so will fall out of the inflation calculations at the beginning of next year.

They insist, therefore, that, given time, inflation will fall away of its own accord, without the need to raise rates in the short term.

The latest ONS figures could strengthen their resolve to keep rates on hold for longer.

"The prospect of a May rate hike has been significantly reduced by today's surprise drop in UK CPI," said James Knightley at ING.

He added that record falls in High Street sales in March, reported by the BRC on Tuesday, could also help to sway opinion on the committee towards holding rates again.


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  • rate this

    Comment number 101.

    Surely the MPC is pretty much on target with inflation at 4%; once the one-year effect of the extra 2.5% VAT disappears next year, inflation will be somewhere between 1.5% and 2.0%. Well done chaps, keep it up!

  • rate this

    Comment number 93.

    85 Marnip

    Could you show me the forecast that said inflation would fall this month, all the forecasts I saw predicted further rises and said that unless the MPC raised rates we'd be entering an era of 'stagflation'. Economics is simple it's just made more complicated by (it seems touchy) economists!

  • rate this

    Comment number 75.

    So many of our foods originate from emerging nations like china, Poland& Asia where wages are rising in line with improved economies. I work for a food manufacturer and we get much better prices & margins selling our food to the emerging nations rather than greedy UK retailers. Supermarkets have steadily dropped pack sizes to keep prices down over the past 2 years...customers aren't better off!

  • rate this

    Comment number 67.

    I am not surprised that inflation has fallen slightly. My own example is possibly typical.
    I work in the private sector. Not only have I not had a payrise in 18 months, I had a 15% paycut imposed.
    I shop around to buy reduced and special priced necessities. I havent had a holiday for 3 years. I only use the car for work.
    I dread a rise in the interest rate. I would have to make even more cuts

  • rate this

    Comment number 56.

    The problem is a fall in inflation doesn't mean prices are falling. It just means they are rising at a slightly lower rate. People's money is still going to buy less.
    I'm a student at university and everything is so expensive I struggle to afford fresh food each week. My health is suffering because the government isn't increasing my student loan with inflation to help cover my costs.


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