Surprise fall in inflation in March is good news for cash-squeezed households

The Office for National Statistics said alcohol and tobacco helped ease inflation pressures in March

The Office for National Statistics said alcohol and tobacco helped ease inflation pressures in March. Picture: Getty Images/iStockphoto - Credit: Getty Images/iStockphoto

Inflation unexpectedly dropped last month, providing some relief for squeezed households.

The consumer prices index (CPI) fell to 2.5% in March, compared with 2.7% in February and significantly below the 3% recorded in January, according to figures from the Office for National Statistics (ONS).

It defies economists' expectations of a steady 2.7% – and will also ease pressure on the Bank of England to hike interest rates next month.

The inflation rate is now much closer to the Bank's 2% target, raising doubts over whether its monetary policy committee (PMC) will follow through on an anticipated interest rate rise at its May 10 meeting.

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.

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'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.'

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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.'

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