British inflation eased in March for the first time since last summer as grocers cut food prices, reducing the chance of a Bank of England rate hike in May and giving it leeway to support the still shaky economy. The unexpected drop in annual inflation to 4.0 percent from 4.4 percent in February - together with a sharp decline in retail sales - gives ammunition to those policymakers who want to see the economy on a solid footing before tackling inflation.
-- Retail sales show worst drop in 16 years
-- Trade deficit narrowest since February 2010
Sterling fell and gilt futures extended an earlier rally that had been driven by speculation about a soft inflation number. Britain's inflation rate is well above the eurozone's and the UK recovery is more shaky than that of France or Germany. The British government is hoping that rates can stay low as its spending cuts - launched to reduce the large public deficit - have yet to take full effect.
Britain's Office for National Statistics (ONS) said it was investigating rumours that the 4.0 percent CPI figure had been circulating in the markets before the official data release. Before the data was released at 0830 GMT, short sterling interest rate futures rose, with traders pointing to market talk that the rate would be well below economists' forecasts.
The fall in the CPI rate last month was aided by a non-seasonally adjusted 1.4 percent month-on-month drop in the cost of food and non-alcoholic drinks, which the ONS said was driven by supermarket discounting. The BoE faces a dilemma as it tries to tame inflation - still at twice its 2 percent target - without derailing a fragile recovery after the economy contracted late last year.
Britain's high street is suffering from a poisonous mix of a rising cost of living, higher taxes and downbeat consumer morale, and business leaders urged the BoE to stay away from raising borrowing costs too soon. The British Retail Consortium said total sales, a measure which includes new floorspace, fell by 1.9 percent in March, the worst drop since the BRC began collecting the data in 1995. Like-for-like sales were 3.5 percent lower on the year.
The sales slump came on top of a recent surprise drop in industrial production and a weak rebound in construction in February, casting doubts about the strength of the recovery. Consumer price inflation has been above the Bank of England's 2 percent target since December 2009.