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Inflation drops to lowest level in a year

19 April 2018

'The latest United Kingdom inflation data is unlikely to get in the way of a May rate hike, but a further deceleration in the core consumer prices index over coming months could prove to be a headache for policymakers later in the year, ' said James Smith, economist at ING.

"The fact that inflation has fallen further means that real wages are likely to have strengthened more than expected, relieving some of the pressure on consumers", noted Paul Hollingsworth, senior United Kingdom economist at Capital Economics research group.

Real earnings started shrinking a year ago, when inflation overtook pay, but the Office for National Statistics says that the trend was reversed in the three months to February.

However, there are signs that Britain's inflation surge has peaked since the consumer price index hit 3.1% in November, the highest in more than five years.

The rural month to month inflation rate registers -2.1 percent.

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"The unemployment rate fell, too, and is at its lowest since 1975".

Brettell added that the interplay between wages and prices will be interesting over the coming months.

Women's clothing prices rose more slowly than usual for this time of year, while alcohol and tobacco also helped to ease the pressure on inflation.

The sharp downward trajectory in inflation could continue, reducing price pressures considerably over the rest of the year. By the early months of 2017, inflation was rising faster than wages - a net drag on the economy as households spent less.

"At the same time the Bank would dearly love some more firepower to counter the next economic downturn, whenever that may be".

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The Bank of England will raise its key interest rate to 0.75 percent in May, said almost all of 76 economists polled by Reuters, with another 25 basis point rise expected just before Britain is due to leave the European Union early next year.

The pound falls sharply on the news, dropping more than 0.5% against the dollar.

In response Peter Dowd, Labour’s shadow chief secretary to the Treasury,  said the figures are still higher than the Bank of England’s target. Against the euro, the pound was trading 0.3 per cent lower at 1.15.

So a fall in "inflation" means the "Brexit effect" could finally be waning.

The inactivity rate (the proportion of people aged from 16 to 64 years who were economically inactive) was 21.2%, lower than for a year earlier (21.6%) and the joint lowest since comparable records began in 1971.

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Inflation drops to lowest level in a year