Pound falls after surprise dip in inflation

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Media caption,

Phil Gooding from the ONS explains why the UK inflation rate has fallen

The pound has fallen after lower fuel prices led to a lower-than-expected inflation rate of 2.4% for April.

This was down from 2.8% in March, according to the Office for National Statistics, and the first drop since September 2012.

Inflation as measured by the retail prices index (RPI) fell to 2.9% in April, from 3.3% the month before.

The pound fell as traders saw the data as giving the Bank of England more leeway to stimulate economic growth.

Petrol and diesel prices fell by 2.1p and 3.9p a litre respectively between March and April, the ONS said. The average price of petrol in the UK is currently £1.33 a litre or £1.38 for diesel.

But food prices continued to rise as cold weather hit crop production. Food prices have risen 40% since 2007 and the recent extended period of cold weather has dented crop yields, putting further pressure on fruit and vegetable prices.

Options widen

The pound fell by 0.7% against the US dollar to $1.5156, and 0.5% against the euro to 1.1783 euros.

Currency traders are assuming that lower inflation will enable the Bank of England to keep interest rates low for longer, which in turn makes the pound less attractive to investors.

The government has signalled that it may be more relaxed about the Bank loosening its grip on inflation, thereby giving incoming governor Mark Carney more flexibility over measures he may introduce to boost growth.

So far these measures have included a £375bn asset purchase plan, known as quantitative easing, but more recently the Bank has concentrated on its Funding for Lending Scheme, aimed at getting banks to lend more freely to households and businesses.

Philip Shaw, an economist at Investec, said: "It looks as though the economy will be growing moderately and inflation will not be quite as high as the [Bank's] Monetary Policy Committee (MPC) fears. That will certainly make Carney's life easier.

"It is a welcome drop in inflation that should give the MPC more flexibility to restart the asset purchase programme if they want to give more stimulus."

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