Yahoo Finance Falling inflation boosts family finances but delivers blow to Bank of England's interest rate plans
Prices are rising at their slowest pace in a year as inflation has dropped away far faster than economists expected, giving welcome relief to household finance.
It also removes some of the pressure on the Bank of England to raise interest rates in an effort to combat price rises.
Inflation fell to 2.5pc in the 12 months to March, down from 2.7pc in February and 3pc in January. Economists had expected it to stay at 2.7pc.
Price rises have slowed, particularly in women’s clothing, shoes and alcohol and tobacco. Slowing furniture costs also helped pull down the rate of inflation.
Part of this is because the impact of the pound’s weakness, which pushed up import prices, is fading from the figures after forcing inflation up sharply last year.
It comes as wages are rising gradually. Average weekly earnings in February were up 2.8pc, meaning incomes are growing more quickly than prices, aiding family finances after a tough year.
The tumbling cost of fixed-line telephones meant communications costs fell over the past year, while personal care became cheaper, as did financial services.
Food price inflation is slowing but only gradually - the weekly shop’s cost is up 3pc on the year, down from 3.3pc in February and 4pc in January.
Britons have been spared the effects of the rising cost of oil, too, with petrol prices flat on the year and gas bills up just 0.6pc.
Electricity bills are mounting, however, with costs up 10.4pc.
The sharp downward trajectory in inflation could continue, reducing price pressures considerably over the rest of the year.
Alan Clarke, an economist at Scotiabank, said: “We expect CPI inflation to fall below 2pc by the end of the year.”
“We believe that will be good news for growth and household real incomes growth accelerates and boosts spending.”
It may also make markets - and the Bank of England - re-think the path of future interest rate hikes.
The Bank has set out to raise interest rates because it forecasts that inflation will still be above its 2pc target in 2021, but inflation is now falling faster than it predicted.
Its latest forecasts in February indicated inflation would only fall to 2.5pc in the second half of this year.
In October Mark Carney said the pound’s weakness would keep affecting prices for years.
“If you have a very big move in the currency, which is what we have had, you still have an effect out in year three, in other words something that is pushing up,” he said.
“In previous forecasts including the August forecast, it has been keeping inflation above target, even out at year three.”
But if this is fading more quickly, it could delay the Bank’s rate rise plans.
Paul Hollingsworth at Capital Economics, said: “Another hike in interest rates in May is now less clear cut, we nonetheless think that it remains more likely than not.”
Beyond next month, future rate rises depend on how the Bank’s Monetary Policy Committee (MPC) interprets the data. Falling inflation could dissuade the committee from raising rates, but could also give its members confidence that the economy is strong enough to take higher costs.
The pound fell 0.7pc against the dollar to $1.4183 as markets reduced their rate rise forecasts.
Mr Hollingsworth said: “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.
“This means that – somewhat counter-intuitively – the fall in inflation might make it easier for the MPC to raise interest rates.”
