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U.K. Inflation Unexpectedly Slows in March for First Time in Eight Months

U.K. inflation unexpectedly slowed in March for the first time in eight months as discounting at supermarkets prompted food prices to plunge.

Consumer prices rose 4 percent from a year earlier after a 4.4 percent increase in February, the Office for National Statistics said today in London. The cost of food fell the most in almost four years. The inflation rate is lower than the 4.4 percent median forecast of 30 economists in a Bloomberg News survey. The pound dropped after the report.

The data may provide some relief to the Bank of England after it held off raising its key interest rate this month to aid the economy during the government’s fiscal squeeze. While inflation is still twice the central bank’s target, the National Institute of Economic and Social Research said the recovery remains “uncertain.” Investors pushed back bets for a rate increase, data compiled by Tullett Prebon Plc showed.

“I suspect it’s a relief for the bank,” said George Buckley, an economist at Deutsche Bank AG in London. “It doesn’t stop inflation being an issue for the bank, it’s just a bit more encouraging. A rate increase in August is looking a lot more likely than May now.”

Pound Drops

The pound dropped as much as 0.5 percent against the dollar after the data were published. It was at $1.6249 as of 10:52 a.m. in London, down 0.6 percent from yesterday. Government bonds extended gains, with the yield on the 10-year gilt falling 6 basis points to 3.75 percent.

Investors now expect the Bank of England to raise its key rate by 25 basis points in October. That compares with an expected quarter-point rise by July predicted as recently as April 8, according to forward contracts on the sterling overnight interbank average.

From the previous month, consumer prices rose 0.3 percent in March, the statistics office said. Food prices fell 1.4 percent, the biggest decline since a 1.7 percent drop in July 2007. So-called core inflation, which excludes costs of energy, alcohol, food and tobacco, slowed to 3.2 percent after a 3.4 percent increase in February. Crude oil prices have soared 35 percent in the last six months.

“We may still see inflation edge up over the months ahead, as further rises in oil prices feed through,” said Andrew Goodwin, an economist at Ernst & Young’s Item Club in London. “But the dreaded 5 percent” rate forecast by the central bank “now looks a fair way off and is unlikely to be realised.”

Recovery

Retail-price inflation, a measure of the cost of living used in wage negotiations, was 5.3 percent in March after 5.5 percent in February. On the month, prices by that measure increased 0.5 percent. Excluding mortgage costs, retail-price inflation was 5.4 percent. The statistics office also said that the government’s sales-tax increase in January added an estimated 0.76 percentage points to inflation that month.

In a separate report, the U.K.’s total trade deficit narrowed to 2.44 billion pounds ($4 billion) in February from 3.86 billion pounds in January. The goods-trade gap shrank to 6.78 billion pounds from 7.79 billion pounds as exports rose 1.3 percent and imports fell 2.2 percent.

Recent data have shown a mixed picture of the economic recovery. While a report on April 5 showed services expanded at the fastest pace in more than a year in March, the statistics office said the next day that manufacturing growth stalled in February. Retail sales fell by a record in March, the British Retail Consortium said today.

‘Challenging’

Marks & Spencer Group Plc (MKS), the U.K.’s largest clothing retailer, said on April 6 that operating costs will increase 5 percent in the current fiscal year, and predicted business conditions will become “increasingly challenging” because of a squeeze on consumer incomes and rising commodity prices. The company reported sales that beat analysts’ estimates.

The inflation data “will remove some of the pressure now that had been building for the Bank of England to raise interest rates,” Azad Zangana, an economist at Schroder Investment Management and a former U.K. Treasury official, said in an interview with Maryam Nemazee on Bloomberg Television in London. “We think they’ll hold until August.”

As well as keeping its benchmark rate unchanged this month, Bank of England policy makers voted to keep their bond purchase plan at 200 billion pounds. The European Central Bank raised its key rate by a quarter percentage point to 1.25 percent this month, the first increase in almost three years.

“The Bank of England has kept its nerve and they deserve credit for that,” U.K. Business Secretary Vince Cable told Sky News. “They’ve kept interest rates low and that’s what the economy needs.”

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

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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