UK inflation falls to 4 pct from 4.4 pct

[April 12, 2011]  LONDON (AP) -- Consumer price inflation in Britain unexpectedly fell in March, official figures showed Tuesday, easing the pressure on the Bank of England to raise interest rates next month.

The Office for National Statistics said consumer prices rose by 4 percent in the year to March, down from February's rate of 4.4 percent. The drop was largely due to lower costs for food, nonalcoholic beverages, recreation and air travel.

The decline was the first in seven months and was unexpected. Most analysts thought inflation would stay around February's level.

The impact was felt immediately in the foreign exchange markets, where traders moved to reduce their expectations of an interest rate increase in May. The British pound dropped to $1.6260 from $1.6310 shortly after the data was released while the euro climbed to 0.8888 pound from 0.8842 pound.

"Today's surprise news may take some of the pressure off of the Bank of England's Monetary Policy Committee to raise rates next month," said Scott Corfe, economist at the Center for Economics and Business Research.

"Still, with consumer price inflation at double the Bank's central target, there are plenty of reasons for inflation hawks to remain concerned about the Bank losing credibility," Corfe added.

Inflation remains a headache for rate-setters at the Bank of England as it's been above the 2 percent target for 16 straight months, largely because of rising energy costs and higher sales taxes.

The inflation figures came after earlier data from the British Retail Consortium showed the sharpest drop in retail sales in at least 16 years. It revealed that total sales were 1.9 percent in March than the year before, the biggest decline since the survey began in 1995.

"This year's later Easter is a factor but this fall goes way beyond anything that can be explained by that alone," said Stephen Robertson, the Consortium's director general. "Uncomfortably high inflation and low wage growth have produced the first year-on-year fall in disposable incomes for thirty years."

The BRC's figures echo recent findings elsewhere that the British economy is not recovering as strongly as some of its peers, such as Germany as households rein in spending to cope with high inflation, rising taxes and elevated energy costs.

The Office for National Statistics also reported that Britain's seasonally adjusted trade deficit in goods and services eased from 3.9 billion pounds ($6.3 billion) in January to 2.4 billion in February, mainly reflecting a 1 billion pounds improvement in the trade in goods.

[Associated Press; By ROBERT BARR]

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