Surprise inflation fall 'good news for consumers but a headache for Bank'
Inflation has unexpectedly dipped to a one-year low, providing relief for cash-squeezed households and easing pressure on the Bank of England to hike interest rates next month.
Figures from the Office for National Statistics (ONS) show the Consumer Prices Index (CPI) fell to 2.5% in March, compared with 2.7% in February and holding below the 3% recorded in January.
Economists were expecting inflation to remain steady at 2.7%.
It brings inflation closer to the Bank of England's 2% target and raises some doubt over whether its Monetary Policy Committee will follow through on a much anticipated interest rate hike at its May 10 meeting.
Experts had widely expected rates to rise above 0.5% next month, with another hike having been factored in for November.
Danske Bank chief economist Conor Lambe said: "This latest reading means that inflation is now at its lowest rate since March of last year and has fallen by 0.5 percentage points already in 2018.
"For UK consumers, this fall in inflation is the second bit of good news in as many days as the latest labour market data showed a rise in the rate of wage growth.
"These two data releases reinforce the view that, going forward, the consumer squeeze is likely to ease gradually.
"But we shouldn't lose sight of the fact that inflation is still above the Bank of England's target and wage growth remains below its pre-financial crisis average. Consumers are unlikely to loosen their purse strings too much over the next couple of months."
Ed Monk, associate director for personal investing at Fidelity International, said the CPI reading is "good news for households but a headache for rate-setters at the Bank, who clearly would like to raise rates next month".
"For the Bank of England, it reduces pressure to raise rates," he added. "The headline inflation rate has now fallen from 3.1% to 2.5% between November and March. While still above target, the trend seems clear.
"Yet the Bank appears intent on tightening in response to rising wages."
Separate ONS figures released earlier this week showed that average weekly earnings increased by 2.8% in the year to February.
"It clearly sees real pay rising as an omen that headline inflation, which is still above target after all, could start to rise again," Mr Monk added.
However, investors were spooked by the unexpected drop in the CPI figure and what it could mean for interest rates, sending the pound down nearly 0.7% against the US dollar to 1.418. Versus the euro, sterling fell nearly 0.6% to 1.148.
The largest downward pressure on the CPI figure in March came from footwear and clothing, having risen by just 0.7% on a monthly basis compared with 2% over the same period in 2017.