Consumer price inflation in the UK fell to its lowest level in an year in March, while retail prices dropped for the first time since 1960.

Annual inflation in March eased to 2.9% from 3.2% in February, a report from the Office for National Statistics showed Tuesday. The annual rate came in line with economists' expectations and reached the lowest since March 2008.

Consumer prices rose 0.2% in March from February as expected by economists. In the previous month, prices were up 0.9%.

The largest downward contribution to the change in the CPI annual rate came from housing and household services. Prices of food and non-alcoholic beverages as well as transport cost also had a downward effect on the annual change in the CPI. At the same time, upward contribution came from recreation and culture category and clothing and footwear.

Excluding food, energy, alcoholic beverages and tobacco, core inflation came in at 1.7% compared to 1.6% in the previous month. March's inflation was the highest since November 2008.

The ONS said the retail price index stood at 211.3, slightly down from 211.4 in February. On a monthly basis, retail prices remained flat in March.

From the previous year, retail prices dropped 0.4% in March, after staying flat in February. The annual rate turned negative for the first time since March 1960. However, prices fell by a less than expected 0.5%.

Housing cost led by depreciation and mortgage interest payments pulled down the annual rate of the RPI. The effect from mortgage interest payments follows February's half percentage point cut in the key interest rate to 1%.

RPIX inflation that excludes mortgage interest payments was 2.2% in March, down from 2.5% in February.

The above target inflation in February had forced the Bank of England Governor Mervyn King to write another open letter to the Chancellor of the Exchequer Alistair Darling. King expects sharp decline in CPI inflation, since its peak in September, to resume in the coming months.

King said it is likely that over the next year CPI inflation will move below target, although the profile of inflation could be volatile, reflecting the reversal of the temporary change in VAT on CPI inflation.

The central bank had held the interest rate at 0.5% on April 9. The interest rate now stands at the lowest level since the central bank was established in 1694.

Economist at Commerzbank, Peter Dixon said the inflation rate came below the upper limit of the central bank's target band for the first time since March 2008. Looking forward, the CPI is expected to remain broadly flat over the coming six months, which ought to be sufficient to drive the inflation rate close to zero by late summer.

But Dixon said this would possibly be a temporary phenomenon as the rate starts to pick up again later this year. The economist expects inflation to remain comfortably above 1%, which ought to quash any residual deflation concerns.

Yesterday, British media reports said Darling is expected to announce a reduction of GBP 15 billion in Whitehall spending in the budget statement on April 22. He is also set to downwardly revise the GDP forecast for the British economy.

The Confederation of British Industry on Monday forecast a slow and fragile recovery in the UK with growth resuming only in the spring of 2010. The industry lobby said the recession deepened more than expected in the first quarter of this year, but it is forecast to moderate in the second half of the year. The CBI revised down its GDP forecast for 2009 to a 3.9% contraction compared to an earlier estimate of a 3.3% GDP decline.

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