UK inflation held steady in March

The Bank of England is faced with high inflation as the economy cools

UK consumer inflation remained unchanged at 2.5% in March, the Office for National Statistics (ONS) has said.

The ONS data showed inflation remained steady after a drop in bedroom and kitchen furniture prices offset a rise in air fares and transport costs.

Retail Prices Index inflation, which includes mortgage interest payments, fell to 3.8%, from 4.1% in February.

The figures are likely to boost calls for further interest rate cuts to help lift the flagging UK economy.

UK interest rates were reduced to 5% last week following the latest meeting of the Bank of England's Monetary Policy Committee (MPC).

So far, the Bank of England has been much more cautious than the US Federal Reserve in cutting rates because of the inflation threat from the higher costs of oil and other commodities, which are pushing up food and fuel bills.

The data comes a day after the ONS said UK producer inflation reached 6.2% in March, its highest rate in nearly 17 years.

Food and energy costs

Stripping out the volatile effects of oil and food, core inflation remained unchanged at February's rate of 1.2%.

This is the lowest level since August 2006, suggesting household financial pressures are forcing retailers to absorb cost increases in their profit margins.

Jonathan Loynes, chief European economist at Capital Economics, said the headline inflation figure "should give the Monetary Policy Committee scope to continue cutting interest rates over the next few months".

But he added: "Of course, the MPC will remain concerned about the outlook."

"Not only are food and energy prices likely to push the headline rate up further over the next few months, but there is a clear danger that the sharp rises in producer prices eventually feed through into core CPI."

He predicted that UK interest rates will end the year at 4%, with further cuts in 2009.

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