Price cuts by retailers fighting to keep hard-pressed consumers in the shops last month triggered the steepest year-on-year falls in the price of goods for nearly two years, helping to cap inflation.

The first signs that the growing squeeze on consumers may help to quell price pressures by stoking retail competition saw headline consumer price inflation remain stable in March at an annual 2.5 per cent.

The figures reignited City speculation that the Bank of England could now deliver a back-to-back cut in interest rates next month, on the heels of last week’s quarter-point reduction to 5 per cent.

Revived talk of a fresh rate cut sent the pound tumbling to a record low against the euro, which hit 80.65p. Sterling’s trade-weighted index fell to an 11-year low of 91.6.

Earlier, the official data, more benign than expected, showed that prices for “core” goods, other than food, drink, tobacco and fuel, fell sharply by 1.8 per cent from a year earlier, in a sign of the more intense struggle by retailers to encourage consumer spending. The news came after the first drop in like-for-like high street sales for two years.

Strong downward pressure on inflation last month came as prices for furniture and carpets rose less sharply than a year earlier, reflecting the housing downturn. Prices for furniture and household goods were up by only 0.5 per cent year-on-year in March, drastically cutting inflation on these products from 1.7 per cent in February. There were also clear signs of growing price competition among retailers of clothing and footwear, with prices for these in March down 5.3 per cent from a year earlier.

The most telling evidence of the “consumer crunch” came in prices for recreational and leisure services such as cinemas, with prices down 1.5 per cent. Upward pressures on the cost of living included a steep jump in air fares, while petrol and oil prices rose by 2.8 per cent in the month, lifting their annual inflation rate to 20.6 per cent, the highest rate since October 1990. Crude oil prices hit records again yesterday with US light crude trading as high as $113.93 per barrel.

Yet hopes of a further rate cut were bolstered as retail price index (RPI) inflation fell sharply, dropping to an annual rate of 3.8 per cent last month, down from 4.1 per cent in February to an eight-month low. The Bank will take some comfort from this, because the RPI figures exert a powerful influence on wage deals.

Economists believe that the Bank is likely to remain cautious as inflation is still set to be pushed up again by big increases in utility bills still feeding through and Budget duty increases.

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