Surprising drop in inflation to 4%

12 April 2011

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."

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