UK inflation holds steady

A high street price squeeze by struggling retailers offset higher transport costs to keep the cost of living unchanged in March, official figures showed today.

A high street price squeeze by struggling retailers offset higher transport costs to keep the cost of living in Britain unchanged in March, official figures showed today.

The official measure of UK inflation, the Consumer Prices Index (CPI), remained at 2.5% last month - marginally below economists' expectations - according to the Office for National Statistics (ONS).

Reductions in bedroom and kitchen furniture prices had the biggest deflationary effect as retailers looked to lure in hard-pressed shoppers over the early Easter.

Rate-setters on the Bank of England's Monetary Policy Committee (MPC), who had access to this month's data before cutting rates to 5% last week, will have been relieved that CPI has not crept further above its 2% target.

Today's inflation data - which also revealed lower price rises than last year for clothing, as well as cheaper computer games and pre-school toys - offers more evidence of the difficulties faced by British retailers, however.

The British Retail Consortium's March survey today registered the first fall in like-for-like sales for nearly two years last month despite the early Easter holiday season, as poor weather hit business.

Factory gate price figures also released this week highlight the remaining inflation risks and could limit the pace of further interest rate cuts from the MPC, however.

The ONS figures showed the highest upward effect on inflation coming from transport costs, mainly due to rising air travel prices on European and long-haul routes.

The annual rate of increase for transport costs reached 7% - the highest since records began in 1997.

Gas bills - unchanged this March but on the way down a year earlier - added to inflationary pressure.

Although petrol prices rose by an average 2.3p a litre last month, this had less of an impact due to similar price hikes a year earlier.

The Retail Prices Index - seen as a more representative inflation measure because it includes mortgage repayments - fell from 4.1% to 3.8% in March.

This was due to lenders passing on the Bank of England's February interest rate cut, compared to a year earlier when rates remained unchanged.

Some economists suggested the better than expected inflation figures could give the MPC leeway to cut rates again next month.

Charles Davis, an economist with the Centre for Economics and Business Research, said: "Today's data shows the Bank of England's balancing act remains a challenge, but the inflation data could have been worse.

"The credit crisis is feeding through to the housing market and threatens to cause a substantial slowdown. However, with inflation stable in March and the economy slowing, the upward pressure on prices should start to fall back through 2008."

"The Bank now has the flexibility for a quarter-point cut in May. Regardless of whether the May cut occurs, we expect base rates to end 2008 at 4.25%."