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The UK Consumer Prices Index (CPI) annual rate of inflation has fallen to 4%,
down from 4.4% in February.
The drop was largely due to a record monthly fall in the price of food and
non-alcoholic drinks, which fell 1.4%, compared with a sharp rise last year.
Retail Prices Index (RPI) inflation - which includes mortgage interest payments
- fell to 5.3% from 5.5% in February.
The fall eases pressure on the Bank of England to raise interest rates.
The pound fell almost 1.5 cents against the dollar immediately after the
figures were announced, to $1.6238, as investors decided the Bank was unlikely
to raise rates as soon as they had previously thought.
The Office for National Statistics (ONS) said supermarkets had reduced their
prices in March.
Fruit prices fell by 4.7%, while bread and cereals dropped by a record 2.6%
when compared with March last year.
Falls in the price of air flights, games and toys also helped to offset rises
in energy costs and cars, it added.
However, analysts warned that inflation could begin to rise again in the coming
months.
Interest rates
Economists had expected the CPI rate to stay at 4.4%, or perhaps even rise
slightly.
Continue reading the main story
Start Quote
The prospect of a May rate hike has been significantly reduced by today's
surprise drop in UK CPI
End Quote James Knightley ING
"It's a not only a surprise, it's a very welcome surprise," said Philip Shaw at
Investec.
But although lower than their expectations, inflation is still twice the Bank
of England's target rate of 2%, and has now been one percentage point or more
above target for 16 months.
This has led to calls for the Bank to raise interest rates - the policy tool
seen as most effective in combating rising prices.
Last week, the Bank's Monetary Policy Committee (MPC) kept rates at a record
low of 0.5% for the 25th month in a row.
Next week it will reveal how members voted.
Members disagree
Last month three of the MPC members called for a rise in rates.
They and some other economists have argued that rates must rise in order to
combat rising prices, which are eroding consumers' spending power.
Those members that voted for rates to be held, backed by a number of leading
economists and business groups, argue that a rise in rates could jeopardise the
UK's fragile economic recovery, particularly in light of the economy's 0.5%
contraction in the final three months of last year.
They say that inflation is high due to temporary and external factors, such as
the recent rise in VAT and high commodity prices, and has yet to be reflected
in wage increases, which would provide longer-term upward pressure on prices.
The rise in VAT came into effect in January, and so will fall out of the
inflation calculations at the beginning of next year.
They insist, therefore, that, given time, inflation will fall away of its own
accord, without the need to raise rates in the short term.
The latest ONS figures could strengthen their resolve to keep rates on hold for
longer.
"The prospect of a May rate hike has been significantly reduced by today's
surprise drop in UK CPI," said James Knightley at ING.
He added that record falls in High Street sales in March, reported by the
British Retail Consortium on Tuesday, could also help to sway opinion on the
committee towards holding rates again.