Smaller fall in inflation dents June rate cut hopes

HOPES of a June interest rate cut from the Bank of England were rapidly fading today after a smaller-than-expected fall in the rate of inflation "put a spanner in the works".

- Jonathan Prynn

The headline measure, the Consumer Prices Index (CPI), dropped from 3.4% to 3.2% in March compared with a consensus forecast of 3.1%. Slower food inflation of 4% was the main reason behind the fall.

Core inflation, which does not include "volatile" components such as food and energy and is closely watched by the Bank's Monetary Policy Committee (MPC), fell from 4.5% to 4.2%.

However, services sector inflation only dropped from 6.1% to 6%, a smaller dip than the markets had pencilled in.

Another key measure tracked by the MPC, the rate of wage increases, is only slowly coming down. ONS figures this week showed wages still rising at 6%, far higher than the MPC will be comfortable with.

The disappointing "miss" immediately sent financial markets scrambling to reassess their projections of the timing of the first move on rates by the MPC.