By Max Clarke
The consumer prices index (CPI) of inflation dropped a surprise 0.4% in March to reach 4.0%, driven in part by a 1.4% drop in the price of food and non alcoholic beverages.
Had UK inflation risen, or failed to drop, the Bank of England’s Monetary Policy Committee (MPC) would have faced rising pressure to raise bank rates, a decision that could further impede the nation’s recovery.
Hawkish MPC members who advocate tightening fiscal policy to curb inflation, led by Andrew Sentance, will likely lost the next committee vote to the ‘Doves’, who consider supporting the economy with low interest rates sometimes at the cost of inflation.
"The fall in inflation is welcome," commented leading union General Secretary Brenden Barber, but went on to warn:
"but the cost of living is still rising at more than twice the level of earnings so workers will struggle to celebrate today's figures."
Business organisations across the country will welcome the drop in inflation as it will likely postpone the MPC’s decision to raise interest rates from their historic 0.5% low.
David Kern, chief economist at the British Chambers of Commerce comments:
“These figures were much better than expected, despite the continued sharp increases in global oil and commodity prices. The fall in inflation points to sharp competitive pressures in the high street, and confirms our assessment that businesses are unable to increase prices while disposable incomes are being squeezed.
“We cannot afford to be complacent, as inflation is still double the Government’s target of two per cent. But this improvement supports the case for the MPC to postpone interest rate increases until the recovery is more secure and the deficit-cutting measures have been absorbed. There is now a realistic hope that the MPC will be persuaded not to raise interest rates in May.”
Retail price inflation also slid slightly to reach 5.3%- a drop of 0.2% in a month.
'The Chancellor has a direct hand in this income squeeze as the VAT rise and budget measures are adding over a percentage point to inflation.