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U.K. inflation eases more slowly than forecast

A customer looks at fruit in a store in central London April 12, 2011.


U.K. inflation edged down in February to the lowest level in over a year, official data showed on Tuesday, keeping hopes alive that easing inflation will allow hard-pressed consumers to increase spending this year and boost the economy.

However, the drop in the headline inflation rate to 3.4 per cent from 3.6 per cent in January was slightly less than economists had forecast, highlighting the risk that price pressures won't fade as quickly as the central bank and the government hope.

Finance minister George Osborne is aiming to provide some relief for low and middle-income earners when he presents his annual budget on Wednesday despite his ongoing drive to erase Britain's huge budget deficit. Falling inflation is seen crucial for the fragile economic recovery to gather pace.

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The Office for National Statistics said a drop in prices for housing, electricity, recreation and culture pushed overall inflation down, while a record rise in prices of alcoholic beverages contributed most to the increase in costs of living.

Analysts had seen a drop in inflation to 3.3 per cent, extending a decline in inflation from September's three-year peak of 5.2 per cent.

In a sign that underlying price pressures are fading as well, core inflation -- which strips out volatile components such as food and energy -- fell to 2.4 per cent, the lowest since November 2009.

The Bank of England forecasts that inflation will fall below its 2 per cent target by the end of this year.

The central bank left monetary policy unchanged this month, deciding that February's extra £50-billion of quantitative easing was enough for now to support the economy through a period of fitful recovery. The minutes from the bank's March meeting will be published on Wednesday.

Most economists do not expect the central bank to add further stimulus once the current round of asset purchases ends in May as the economy seems to have avoided a renewed recession.

Some of the Bank's Monetary Policy Committee members also expressed concerns about whether inflation would fall as fast as forecast, once the effect of one-off factors such a s the impact of the rise in sales tax at the start of last year had faded.

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Petrol prices have hit a record high in Britain recently and a drought in parts of England has stoked fears that food prices could rise sharply.

Factory gate inflation picked up in February after a sharp rise on the month in input costs for crude oil and home-produced food.

But major utility companies have announced price cuts of about 5 per cent to their gas and electricity prices, with start dates between January and March.

Higher oil and food costs are a double-edged sword for inflation, in the view of many of the Bank's policymakers. Although they push up prices in the short-term, in the long r un they dampen consumer demand and may pull down inflation if broader expectations remain stable.

The broader retail price index measure of inflation, which is often used in wage negotiations, fell to 3.7 per cent from 3.9 per cent.

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