'Concern' as inflation goes up

Struggling households came under increased pressure last month as a fall in the number of supermarket promotions triggered an unexpected rise in the rate of inflation.

The Consumer Price Index (CPI) rate of inflation rose to 3.5% in March, from 3.4% in February, the Office for National Statistics (ONS) said, halting five months of declines and defying City expectations that it would hold steady.

Food and non-alcoholic drinks fell 0.5% on the month but this compared with a 1.4% fall last year when supermarkets and other retailers offered a wider range of sales and special offers, while petrol and diesel pump prices hit record highs.

Economists said the rise was likely to be temporary but would still concern Bank of England governor Sir Mervyn King and the Monetary Policy Committee (MPC), who previously predicted that CPI would fall to the Government's 2% target by the end of this year.

The Bank will be less inclined to pump more money into the economy through its quantitative easing (QE) programme if inflation continues to remain above target, analysts said.

But a spokesman for the Treasury said inflation has fallen by a third since September and is expected to continue falling this year, providing "ongoing relief for family budgets".

Households were squeezed by high prices and sluggish wage growth throughout 2011 but pressure has eased this year due to the waning impact of last year's VAT hike, falling energy, food and commodity prices and a number of bill cuts from utility providers.

Vicky Redwood, chief UK economist at Capital Economics, said the halt in the downward trend "should be only temporary".

She said: "Nonetheless, today's figures could reduce the chances of more QE being announced at May's MPC meeting. Inflation in the first quarter as a whole was a touch higher than the MPC forecast in February and some members have been expressing concern that inflation might not fall as sharply as February's forecasts showed."

The average cost of petrol and diesel at the pump hit a record high in March, up to £1.38 and £1.46 a litre respectively.

But the ONS said the rise in fuel and lubricants was similar to last year so had little impact on the rise in inflation.

The biggest upward pressure came from the softer drop in food bills, a smaller fall in recreation and culture costs, and higher clothing and footwear prices.

Fruit, bread and cereals, and meat saw prices rise in March, compared with falls a year ago, which acted as a drag on the overall food category.

The softer fall in prices follows a fierce price war between the supermarkets, as Tesco introduced its Big Price Drop, Sainsbury's fought back with its Brand Match scheme and Asda offered its Price Guarantee.

But Tesco, which reports annual results tomorrow, admitted its £500 million scheme had been a flop after dismal trade over Christmas continued into the new year.

Clothing and footwear prices were up 2.2%, driven by women's outerwear, while recreation and culture saw resistance from higher charges for toys and recording media.

TUC general secretary Brendan Barber said stubbornly high inflation pushed down real wages, while campaigners said older people were the worst hit as pensions and savings were eroded.

Mr Barber said: "Inflation is not falling as fast as many hoped. With pay growth also weak, families are getting poorer every month."

Ros Altmann, director general at over-50s group Saga, said price increases remain "noticeably higher" for older people than the average family.

She said: "All odds seem stacked against older people's finances - high inflation, low interest rates, negative impact of quantitative easing, cuts in savings credits and the latest tax proposal included in the recent Budget.

"This is not good news and Saga desperately wants to see policymakers give these age groups some necessary respite, rather than ignoring their plight."

There was some downward pressure in March as "big six" energy suppliers Scottish Power and E.ON introduced cuts to their tariffs.

Housing and household services costs, including electricity and gas, subsequently dropped 0.2% on the month.

Elsewhere, transport costs fell on the month as second-hand car prices went down 0.1%, compared with a 1.5% rise last year.

Alternative measures of inflation did fall, with the retail price index dropping to 3.6% in March from 3.7% in February.

Chancellor George Osborne updated ministers on the inflation figures at this morning's meeting of Cabinet at 10 Downing Street.

A Number 10 spokeswoman said: "The Chancellor set out the fact that inflation has fallen by one-third since September and most market commentators expect inflation to continue falling later this year, which will provide some relief for families' budgets."

PA