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UK inflation expected to hold steady despite fall in food and fuel prices

It would mean inflation would have held below wage growth for the first time in nearly a year.

Inflation is expected to have held steady in March as a drop in food and fuel prices was offset by higher airfares around the earlier Easter holidays.

A consensus of economists forecast the Office for National Statistics’ (ONS) Consumer Price Index (CPI) to come in at 2.7% for March, in line with February’s reading and holding below the 3% recorded in January.

Britons are believed to have benefited from slightly weaker food prices, which had surged on the back of the weaker pound, as well as a bigger month-on-month drop in fuel prices than a year earlier.

But air fares are likely to have helped offset the drop, having risen during the Easter bank holiday, which fell earlier in the calendar this year.

If consensus estimates prove correct, it would mean inflation would have held below wage growth for the first time in nearly a year, with average earnings having increased by 2.8% in the year to February.

Some experts – including George Brown, economist at Investec – are expecting inflation to fall even further.

Mr Brown highlighted BRC Shop Price Index data, which showed food prices dropping at their fastest rate in 18 months in March, which could have a larger impact on the inflation figure alongside fuel costs.

“Overall though, the risks to inflation are skewed to the downside,” he said.

“We suspect that these factors will mean that we see another step-down in CPI inflation in March such that it falls to a one-year low of 2.5%.”

Assuming the rate of pay growth indeed outstripped inflation, it is likely to ramp up pressure on the Bank of England (BoE) to raise interest rates beyond 0.5% at its next meeting in May.

Morgan Stanley’s chief UK economist Jacob Nell said: “Today’s strong pay data cements our long-standing call for the BoE to hike rates in May.

“While recent activity data and surveys have suggested some slowing in the economy’s growth momentum, we think the MPC (Monetary Policy Committee) currently places less emphasis on this and more weight on domestically generated inflation.

“With the labour market remaining at its tightest and pay growth accelerating, we expect continued upward pressure on CPI from homemade inflation to drive the BoE to hike twice more next year.”

Two of the nine Monetary Policy Committee (MPC) members already voted to hike rates to 0.75% last month, marking the first split vote since last November when rates were raised from 0.25% to 0.5%.

Despite keeping rates on hold, the committee said that “ongoing tightening of monetary policy” would be needed to bring inflation back to the Bank’s 2% target.

It confirmed earlier comments from Governor Mark Carney, who said rates would need to rise “somewhat earlier and by a somewhat greater degree” to bring CPI back on track.

Experts widely believe rates will rise in May and possibly again in November, with another due in 2019, which would see rates climb to 1.25% next year.

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