Inflation dip eases interest rate hike fear

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 per cent in March, compared with 2.7 per cent in February, and holding below the 3 per cent recorded in January. Economists were expecting inflation to hold steady at 2.7 per cent.

It brings inflation closer to the Bank of England’s 2 per cent target and raises some doubt over whether its Monetary Policy Committee will follow through on a much anticipated interest rate hike at its May 10 meeting.

Experts widely expect rates to rise above 0.5 per cent next month with another hike expected in for November.

Ed Monk, associate director for personal investing at Fidelity International, said the CPI reading was “good news for households but a headache for ratesetters at the Bank, who would like to raise rates next month. For the Bank of England, it reduces pressure to raise rates. The headline inflation rate has fallen from 3.1 per cent to 2.5 per cent 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 per cent 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,” he 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 per cent against the US dollar to 1.418. Versus the euro, sterling fell nearly 0.6 per cent to 1.148.

Food prices rose 0.3 per cent compared with a month earlier, compared to a 0.6 per cent rise over the same period in 2017, with fruit and fish falling 1.4 per cent and 1.3 per cent, respectively.