CPI inflation dips to 4% in March

Inflation fell by 0.4% to 4% in March as the cost of food and drink lowered, but it is still double the Bank of England's target.

The fall in the consumer price index (CPI) is the first for eight months and marks a drop from the 28-month high of 4.4% in February.

Jeremy Cook, chief economist at World First foreign exchange, says March's lower inflation figure leaves "no illusion" of an interest rate rise before August.

By far the largest downward pressure to the change in CPI came from food and non-alcoholic beverages, where prices fell by 1.4% between February and March this year.

Sterling dropped as much as 0.5% against the dollar on the news. It was at $1.6249 as of 9:33am in London, down 0.6% from yesterday.

The fall in CPI will give a boost to Bank Governor Mervyn King, who has resisted increasing pressure to raise the base interest rate from its record low to curb rising inflation.

The Bank held fire on rates this month, keeping them at 0.5% and opting to wait for clearer signs of recovery before following the European Central Bank (ECB) in a hike.

Earlier this month the ECB increased the cost of borrowing by 0.25% to 1.25% in its first rate rise in three years, despite the EU having a much smaller inflation problem than the UK.

Cook says the drop in CPI will come as a welcome relief for homeowners and businesses worried about the cost of a borrowing, but the UK could now be looking at a second consumer slowdown as austerity measures bite.

"It shows the UK consumer is tightening its purse strings in the face of price increases, a trend backed up by the horrific British Retail Consortium numbers we received overnight that showed sales down by 3.5%."

Emma Wilson, of forex specialists Currency Solutions, says the currency market's reaction to the CPI data shows a shift in expectations following the financial crisis.

"The fact we're breathing a sigh of relief that inflation has fallen to just double the Bank's target shows how the economic landscape has changed in recent years.

"There's a feeling that in the new world order the role of the Bank is to manage chaos rather than steer the UK economy through calm waters."