Pressure on Bank of England eases as inflation dips to 12-month low
Inflation has unexpectedly dipped to a one-year low, providing relief for cash-squeezed households and easing pressure on the Bank of England to hike interest rates next month.
Figures from the Office for National Statistics (ONS) show the Consumer Prices Index (CPI) fell to 2.5% in March, compared with 2.7% in February and holding below the 3% recorded in January.
Economists were expecting inflation to hold steady at 2.7%.
It brings inflation closer to the Bank of England's 2% target and raises some doubt over whether its Monetary Policy Committee (MPC) will follow through on a much anticipated interest rate hike at its May 10 meeting.
Experts had widely expected rates to rise above 0.5% next month with another hike having been factored in for November.
Ed Monk, associate director for personal investing at Fidelity International, said the CPI reading is "good news for households but a headache for rate-setters at the Bank, who clearly would like to raise rates next month.
"For the Bank of England, it reduces pressure to raise rates. The headline inflation rate has now fallen from 3.1% to 2.5% between November and March. While still above target, the trend seems clear.
"Yet the Bank appears intent on tightening in response to rising wages."
Separate ONS figures released earlier this week showed that average weekly earnings increased by 2.8% in the year to February.
"It clearly sees real pay rising as an omen that headline inflation, which is still above target after all, could start to rise again," Mr Monk added.
However, investors were spooked by the unexpected drop in the CPI figure and what it could mean for interest rates, sending the pound down nearly 0.7% against the US dollar to 1.418.
Versus the euro, sterling fell nearly 0.6% to 1.148.
The largest downward pressure on the CPI figure in March came from footwear and clothing, having risen by just 0.7% on a monthly basis compared with 2% over the same period in 2017.
ONS head of inflation Mike Hardie said: "Inflation fell to its lowest rate in a year, with women's clothing prices rising slower than usual for the first time this year.
"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."
Chancellor Philip Hammond has changed the timing of the Budget from the spring to autumn, meaning bigger Government decisions which might have affected tax and prices were announced later in the year.
It resulted in tobacco prices rising just 0.1% in March, compared with a 2% month-on-month rise last year.
Mr Hardie added: "Growth in the price of goods leaving factories continued to slow, mainly due to a smaller increase in the price of food products compared with this time last year."
Food prices rose 0.3% compared with a month earlier, versus a 0.6% rise over the same period in 2017, with fruit and fish applying the most downward pressure, having fallen 1.4% and 1.3% respectively.
At the pumps, motorists also faced lower fuel costs last month, with petrol down by 1.6p per litre on the month to 119.2p per litre.
Diesel fell 1.5p to 122.9p.
The Retail Prices Index (RPI), a separate measure of inflation, was 3.3% last month, down from 3.6% in February.
The Consumer Prices Index including owner-occupiers' housing costs (CPIH) - the ONS' preferred measure of inflation - was 2.3% in March, down from 2.5% in February.
Samuel Tombs, chief UK economist for Pantheon Macroeconomics, expects the inflation rate to decline further in the coming months.
"Looking ahead, we continue to expect CPI inflation to fall sharply and to average just 2.1% in Q4," he said.
Meanwhile, EY Item Club chief economic adviser Howard Archer is forecasting CPI to reach the Bank of England's 2% target by the end of this year, with inflation hovering close to that level in 2019.