April 21 (Bloomberg) -- The U.K. inflation rate dropped to the lowest level in a year last month as the recession blunted price pressures across the economy.

Consumer prices rose 2.9 percent from a year earlier, compared with 3.2 percent in February, the Office for National Statistics said today in London. The result matched the median forecast of 29 economists in a Bloomberg News survey. The retail price index annual gauge dropped for the first time since 1960.

Unemployment data tomorrow may show jobless benefit claims jumped to the highest level since 1997 as the economy endured its worst recession in almost three decades. Energy costs have dropped, and Tesco Plc, Europe’s second-largest retailer, today reported the slowest profit growth in 15 years as price cutting by rivals eroded its U.K. market share.

“People are cutting back on spending and rising unemployment will have an impact,” said George Buckley, chief U.K. economist at Deutsche Bank AG in London. “We are going to get below 1 percent inflation by September.”

Inflation slowed as household gas bills fell and the cost of heating oil dropped, the statistics office said. Prices for food and non-alcoholic drinks also declined, led by vegetables, fruit, bread and cereals.

U.K. wholesale natural gas prices may drop about 50 percent this summer as energy importers including Centrica Plc, the country’s biggest supplier, secure cheaper liquefied natural gas in international markets, Societe Generale SA analysts Thierry Bros and John Honore said in a report on April 9.

Tesco Earnings

Tesco today reported net income of 2.16 billion pounds ($3.2 billion) in the year ended Feb. 28. That was the weakest performance since fiscal 1994, when profit fell 24 percent. The company introduced its Discount Brands label in September to stem a slide in its market share as price-conscious shoppers turned to rivals such as Wal-Mart Stores Inc.’s Asda.

The U.K. central bank forecasts that inflation will slow to 0.3 percent in 2011, below the 2 percent target. U.K. producer prices increased in March at the slowest annual pace in 20 months as raw material costs dropped.

Bank of England Governor Mervyn King last month said in a letter explaining why inflation had breached the government’s upper 3 percent limit that a “sharp decline” in the rate is likely to resume, though it may remain “volatile” because of the weakness of the pound, which makes imports more expensive.

The U.K. currency advanced against the U.S. dollar today, to trade at $1.4579 by 10:15 a.m. in London, from $1.4539 yesterday.

Inflation Expectations

British consumers’ expectations for inflation in the next year rose to 1.8 percent in March from 1.5 percent in February, Citigroup Inc. said on April 3, citing a poll by YouGov Plc.

Unemployment benefit claims probably increased by 116,000 in March, according to the median forecast of 24 economists in a Bloomberg News survey. The statistics office will release that data tomorrow. Hays Plc, the U.K.’s largest recruitment company, said on April 9 it will see increased “pricing pressure” through 2009 as demand for temporary workers slumps.

The retail price index measure of inflation, which is used in wage bargaining as a gauge of the cost of living, showed a 0.4 percent annual price drop in March. That was the first decline in almost half a century. Excluding mortgage interest payments, it rose 2.2 percent from a year earlier, the least in three years.

Bank of England policy makers have cut the benchmark interest rate to a record low of 0.5 percent and started buying assets with newly created money to prevent deflation from taking hold.

The Confederation of British Industry yesterday predicted the economy will shrink 3.9 percent this year, curbing tax revenue and pushing Britain’s deficit to 11.2 percent of gross domestic product. Chancellor of the Exchequer Alistair Darling will tomorrow publish his 2009 Budget, while the government has already pledged billions of pounds to kick-start growth.

Credit availability to companies in the U.K. may increase in the next three months after a sharp slowdown last year, the Bank of England said today, citing a survey of bank lending.

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net.

Last Updated: April 21, 2009 05:19 EDT