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Inflation At Lowest Level In More Than Two Years, With CPI At 3%

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Inflation fell to its lowest level in more than two years last month, official figures showed today, as high street discounting took the pressure off household budgets. | PA

Inflation fell to its lowest level in more than two years last month, official figures showed on Tuesday, as high street discounting took the pressure off household budgets.

The Consumer Price Index (CPI) rate of inflation fell to 3% in April, compared with 3.5% in March, its lowest level since February 2010, the Office for National Statistics (ONS) said.

In further evidence that the weak economic climate is forcing retailers to cut prices to draw in customers, clothing and footwear prices rose by just 0.2% in the period compared with 1.4% last year.

And softer excise duty rises on alcohol and tobacco, as well as lower air fares due to the timing of Easter, also helped keep a lid on the rising cost of living.

Bank of England Governor Sir Mervyn King narrowly avoided sending his 10th "Dear Chancellor" letter to explain why inflation is higher than the Government's 2% target, as at 3% it is now within one percentage point of that goal.

Inflation has fallen from 5.6% last September due to the waning impact of the VAT hike at the start of 2011, falling energy, food and commodity prices and a number of bill cuts from utility providers.

However, it has not dropped as quickly as the Bank of England expected after fears over increasing tensions between the West and Iran pushed oil prices higher in March.

The sharp decrease in inflation in April is likely to bolster the case for the Bank to pump more emergency cash into the economy through its quantitative easing programme.

The economy entered a technical recession in the first quarter of the year as gross domestic product declined 0.2%, following a 0.3% drop in the final quarter of 2011.

Chloe Smith, the economic secretary to the Treasury, said: "Inflation is down and back within the target range for the first time since 2010, which is good news and will provide some welcome relief for family budgets."

The most significant downward pressure on prices in April came from the transport sector, which saw prices rise 1.2% compared with a 2.8% rise the previous year.

The largest downward effect came from air transport where the timing of Easter meant fares rose 7.4% compared with a huge 29% surge last year.

A smaller downward impact came from second-hand cars, the ONS said, where prices rose by less than a year ago.

Alcohol and tobacco prices rose 2.9%, compared with a record 5.3% rise last year, as excise duty rises in the March Budget had a smaller impact on overall prices.

The softer rise in clothing prices was driven by cheaper womenswear, the ONS said.

Retailers have kept prices low and sacrificed profit margins in a bid to draw in cash-strapped consumers, whose confidence has been knocked by the weak economic climate.

The most significant upward contribution came from restaurant and hotel prices, which rose 1% compared with a 0.6% increase a year ago.

Housing and household services also had an upward effect as lower utility bills were overshadowed by higher rents.

Alternative measures of inflation also fell, as the Retail Price Index fell to 3.5% from 3.6% in the period.

Jeremy Cook, chief economist at currency experts, World First, said the figure came on the back of lower oil prices.

“Unfortunately, this will provide no genuine comfort to households given that wage growth is nowhere near this number.

“Of course, the slip in CPI will give those people who believe that further QE is needed to keep the UK economy going more room to manoeuvre. This is ahead of tomorrow’s publication of the minutes from the latest Bank of England meeting that we expect to show only one vote for another round of QE.

“This is the first print within the target zone since late 2009 although the defining characteristic of the UK inflation picture through the crisis has been its “stickiness”; its refusal to fall. We expect the CPI figure to remain around 3% for the rest of the year."

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