Surprising drop in inflation to 4%
The official measure of inflation has dropped from 4.4% to 4% on the back of falling food and non-alcoholic drink prices.
This is the first time since July last year the consumer prices index (CPI) has experienced a drop.
The retail prices index, which includes council tax and mortgage payments, has also fallen from 5.5% to 5.3%.
The drop is mainly due to falling food and non–alcoholic beverage prices. Overall prices have fallen by 1.4% between February and March compared to a 0.3% rise between the same two months a year ago.
Air transport and recreation and culture costs are two other significant drivers in reducing inflation.
It is still double the Bank of England's recommended 2% level but the slight fall will reassure the Bank of England that inflation is still at least manageable.
Sigh of relief
"The fact that we're breathing a sigh of relief that inflation has fallen to just double the Bank's target shows how the economic landscape has changed in recent years," says Emma Wilson, spokesperson for currency solutions.
UK sterling has reacted badly to the new 4% CPI figure, losing 0.5% on the euro in the first 10 minutes after the announcement was made. Wilson thinks this loss is a sign that the UK economy still isn't robust enough to withstand a rate hike on the Bank of England's base rate, currently at 0.5%.
She adds: "There's a feeling that in the new world order the role of the Bank is to manage chaos rather than steer the UK economy through calm waters."
Analysts had expected CPI to remain at 4.4% and increase to 5% by the end of the year.
Simon Hayes, chief UK economist for Barclays Capital, still believes we will see a rise later in the year.
"We do not see this as the start of a weakening trend, however: we expect CPI inflation to rise to 4.7% by September as persistently high energy prices feed through into domestic utility bills."
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.