UK inflation steadies in March, boosts rate cut chances

Britain's main inflation rate unexpectedly held steady last month, official data showed yesterday, suggesting strong price pressures further up the economic pipeline have yet to be passed on to consumers.

The Office for National Statistics said consumer prices rose by 0.4 per cent on the month, leaving the annual rate unchanged at 2.5 per cent. Analysts had expected a monthly rise of 0.6 per cent for an annual rate of 2.6 per cent.

Retail price inflation, often used as a benchmark for wage bargaining, also undershot expectations. On the month, retail prices rose 0.3 per cent to give an annual rate of 3.8 per cent, the weakest since last July.

Sterling fell to a record low against the euro and interest rate futures rose as the weaker than expected figures suggested the Bank of England has room to further cut interest rates this year to shore up the economy in the wake of the credit crunch.

Policymakers, who had access to the inflation data prior to cutting rates to five per cent last week, have voiced concern over inflationary pressures building up in the economy and have said they expect inflation to rise to around three per cent this year.

But a steady reading last month may alleviate some of the concerns stoked by data yesterday showing record input price inflation and the strongest factory gate inflation in nearly 17 years in March.

"It's good news for the Bank of England although it's worth bearing in mind that they would have seen these figures before last week's rate decision," said George Buckley, an economist at Deutsche Bank.

"The weak core inflation number suggests firms are having difficulty passing higher costs to consumers."

The core annual inflation rate held steady at 1.2 per cent last month.

The ONS said the largest downward effect on the CPI figures came from furniture, household equipment and maintenance and recreation and culture components.

However, transport costs soared at their fastest annual rate since records began in 1997, up seven per cent, as air fares to other European countries rose this year, having fallen a year ago.