The Government`s target measure of inflation drifted lower from a record high 3.1% in March. However, the key inflation measure continues to linger way above the Bank of England official benchmark of 2%. In March, the number rose above the sensitive level of 3%, which forced the central bank chief Mervyn King to pen an explanatory letter to the Chancellor Gordon Brown.
On a monthly basis, the CPI moved up 0.3% in April, matching the consensus.
The ONS noted that the main downward effect on inflation came from gas and electricity bills, which declined this year, but rose during the same period last year. Housing, water, electricity, gas and other fuels deducted 0.22 percentage points from the annual inflation.
Men`s and women`s clothing exerted the largest upward effect on the inflation rate as prices increased this year after the introduction of higher priced replacement stock. Clothing and footwear added 0.7 points to the annual price increase.
The Retail Price Index - RPI annual inflation, used as a yardstick during pay bargaining, slid to 4.5% in April from 4.8% in the prior month. The rate was in sync with expectations. This is the lowest rate since the 4.2% rate recorded in January. The decline was largely due to the similar factors that affected the CPI, the ONS observed. The all items RPI inflation, excluding mortgage interest payments, dropped to 3.6% from 3.9% last month.
The return of the annual inflation rate within the tolerance range may give some breathing space to the Monetary Policy Committee, which is slated to release its latest Inflation report on Wednesday. Last week, the Bank of England raised its key interest rate to 5.5%, the highest level in six years, to put a lid on surging inflation. This is the fourth rate increase since August 2006.
Acknowledging the pick-up of CPI inflation to 3.1% in March, the central bank said it expects the headline inflation to fall back near the 2% official target during the course of the year. Lower gas and electricity prices as well as weaker import price inflation are expected to aid this retreat in inflation.
The central bank said, “Relative to the 2% target, the risks to the outlook for inflation in the medium term consequently remain tilted to the upside.”
Some analysts opine that solid first quarter GDP growth numbers may signal further monetary tightening after a hike in May.
BNP Paribas said in a note, “The MPC is likely to remain vigilant as business sentiment surveys are indicating that producers have been rebuilding profit margins. If the economy does not show any signs of slowing between now and August, the MPC might feel compelled to tighten the monetary stance once more at that time.”
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