Inflation unexpectedly drops to 4%

Published on Tuesday 12 April 2011 13:33

INFLATION has unexpectedly dropped, official figures showed today, weakening the prospect of an imminent interest rate hike by policymakers at the Bank of England.

The Consumer Prices Index (CPI) rate of inflation was 4% in March, down from 4.4% in February, but still double the Government's 2% target, the Office for National Statistics (ONS) said.

City analysts had expected the CPI rate to hold at 4.4%.

The drop in the cost of living was driven by falling food prices, the ONS said, which slipped 1.4% - the biggest month-on-month drop since between June and July 2007 - as supermarkets rolled out heavy discounts to draw in cautious consumers.

The improved figures will be welcomed by the Bank's Monetary Policy Committee (MPC) which has been under pressure to raise interest rates from their historic lows of 0.5% as it battles with stubbornly-high inflation.

Last week, the MPC held interest rates for the 25th month in a row as it faced a challenging mix of soaring inflation and sluggish economic growth.

The UK economy went into a shock 0.5% decline in the final quarter of 2010 and recent surveys of the services and manufacturing sectors have offered a mixed picture of the recovery.

The majority of MPC members believe the inflation surge is down to temporary price shocks and are minded to wait and see how well the economy fared in the first three months of 2011 before tightening monetary policy.

Today's figures will further alleviate pressure to raise interest rates imminently - even though the Bank itself has forecast inflation hitting 5% in the coming months.