Inflation fell to its lowest level in more than a year in March as supermarkets cut the price of milk and other dairy products, according to official figures released on Thursday.
The Office for National Statistics said the consumer price index for the year to March rose by 1.8 per cent compared with an increase of 2 per cent the previous month. Between February and March, prices rose by 0.2 per cent.
The weaker than expected figure prompted a jump in government bonds as traders calculated the news reduced the likelihood that the Bank of England would raise the cost of borrowing later this year. The reading marks the fourth consecutive month that inflation has been at or below the Bank’s 2 per cent target..
Core inflation, which excludes energy food, alcohol and tobacco, fell from 1.4 per cent to 1.3 per cent in March.
Richard McGuire at RBC Capital Markets said the data would leave the Bank’s monetary policy committee more comfortable with interest rates at 4.5 per cent and would increase speculation that the next move will eventually be downwards.
“The report is bond positive particularly at the shorter end of the curve and negative for sterling,” said Mr McGuire.
John Butler at HSBC said: “UK inflation is back below target, despite the Bank of England’s warning to the contrary. Competitive pressures and weaker consumer demand seem to be keeping a lid on inflation. Overall, this number, although backward looking, is a blow to the interest rate hawks.”
The ONS said that the largest downward effect on the CPI came from the food and non-alcoholic beverages component, which fell 0.4 per cent over 12 months..
Competition in the UK’s supermarkets saw the average price of a pint of milk fall by about 2p compared with a year ago, while cheese, eggs, potatoes and cauliflowers were also cheaper.
However, there was evidence that high energy costs are feeding through into headline inflation. The ONS said that the the 7 per cent annual jump in the housing, water, electricity, gas and other fuels component was the highest since 1997, and was driven by soaring utility bills.
The Retail Price Index, which includes housing costs, and which is used as a measure for calculating wage claims and index-linked contracts, was up 2.4 per cent in March, unchanged for the the third month in a row.
RPIX, which excludes mortgage interest payments, rose 2.1 per cent, down from the 2.3 per cent recorded in February.
Separately, figures from the Council of Mortgage Lenders appeared to confirm the housing market is enjoying its seasonal strength. The CML said gross mortgage lending hit £28.3bn in March, up 26 per cent from February and the highest March on record.
