UK inflation in surprise fall, raises doubts over rate hike

"The fact that inflation has fallen further means that real wages are likely to have strengthened more than expected, relieving some of the pressure on consumers", noted Paul Hollingsworth, senior United Kingdom economist at Capital Economics research group.

Overall wage growth in the three months to February was steady at 2.8% - just behind the rate of inflation over the period.

However, if the traditional measure of inflation, the consumer price index (CPI) is used, then inflation is running above wages at 2.9% vs 2.8%.

"While this print is unlikely to dissuade the Bank of England from hiking next month - a rate increase is still expected - it will likely force the market to reconsider whether the United Kingdom will remain an "inflation outlier", and could lead to a repricing of when they hike next, weighing on the pound", he added.

United Kingdom inflation slowed to a one year-low in March, diminishing scope for a rate hike in May as markets widely expect.

What's this? is a calculation of how fast prices are rising.

On the back of the news, sterling fell by 0.74% against the dollar to $1.41.

The International Monetary Fund lifted its growth forecast for Britain this year to 1.6 percent on Tuesday due to stronger overseas demand, but this is below Britain's historic growth rate and that expected for most advanced economies this year.

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Part of the fall was driven by "women's clothing prices rising slower than usual for this time of year", Mike Hardie, the ONS's head of inflation said.

Lower inflation means there should be some easing in the long squeeze on household purses, which have been pincered by anaemic wage growth remaining doggedly below inflation.

"But we shouldn't lose sight of the fact that inflation is still above the Bank of England's target and wage growth remains below its pre-financial crisis average".

He said the level of debt in the economy remains high, as consumer spending was stable even when inflation was high, and this must be the effect of more borrowing.

Experts had widely expected rates to rise above 0.5% next month with another hike having been factored in for November.

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.

The March CPI rate of 2.5 per cent was way below the BoE's forecast of 2.8 per cent.

As well as expectations of higher interest rates, the currency has been buoyed by waning concerns over Brexit after the British government agreed on the outlines of a transition deal with the European Union after it leaves in March 2019.

(Copyright © 2015. All Rights Reserved.)
 
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