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UK inflation rate drops

THE headline rate of inflation last month slowed for the first time since September, raising hopes that the figure has reached its peak.

Utility price cuts and a slower rise in food prices helped to send the Consumer Prices Index (CPI) back down to three per cent in February.

In January it soared to a 14-month high at 3.5 per cent – well above the Bank of England's two per cent medium term target.

Economists said the larger than expected fall should help to bring some comfort that underlying prices in the UK economy remain pretty subdued.

However, while opinion remains divided over whether inflation is set to stay steady or rise in the coming months, economists believe it will fall back sharply later this year.

Jonathan Loynes, chief European economist says there is nothing in the figures to suggest that the Monetary Policy Committee needs to think about tightening policy.

"Looking ahead, inflation may stay close to current levels over the next few months, perhaps triggering another letter from Mervyn King to the Chancellor.

"But it should fall back sharply later this year and in 2011 as the vast amount of spare capacity in the economy keeps core price pressures subdued,” he added.

Howard Archer, chief UK economist at IHS Global Insight, believes CPI could rise further in the short term although it may be back under the Bank’s 2 per cent by the end of the year.

"Given that oil prices bottomed out early in 2009 and then firmed, base effects will become more favourable,” he says.

"Meanwhile, underlying price pressures should be contained by substantial excess capacity, likely bumpy and gradual recovery, wage moderation amid high unemployment and job insecurity, and the need for retailers to price competitively in the face of still limited consumer spending."