UK inflation hits new four-year low, house prices continue rise

By Ana Nicolaci da Costa and David Milliken LONDON (Reuters) - British inflation fell to its lowest in over four years in March, easing pressure on living standards and raising the prospect that prices may now be rising by less than wages for the first time in years. The sharp decline in Britons' living standards since the financial crisis - due to a mix of tax rises, high inflation and meagre wage growth - has become a key political battle ground, a year before national elections. Tuesday's data showed that consumer price inflation dropped to 1.6 percent in March from February's 1.7 percent - the lowest level since October 2009, according to the Office for National Statistics. Wage numbers due on Wednesday are forecast to show average earnings growth picking up to 1.8 percent from 1.4 percent - which if true would be the first time that wages have outpaced inflation since April 2010. British wages typically rose by around 4-5 percent a year before the financial crisis, but since mid-2008 have mostly risen by less than inflation. Chancellor of the exchequer George Osborne said the data showed his coalition government policies were bringing greater economic security, and his civil servants have said that on some measures, living standards are already rising. But his Labour Party opposite number, Ed Balls, said the CPI data failed to capture rapidly rising house prices, and that tax and benefit changes since 2010 meant that the average household was almost 1,000 pounds a year worse off. House prices are rising at their fastest since June 2010, up 9.1 percent on the year, according to ONS data released alongside the CPI figures. Prices in London are up 17.7 percent, the biggest jump since July 2007. This strong rise in house prices also risks complicating the Bank of England's position that it is in no hurry to raise interest rates while inflation stays near its 2 percent target and unemployment is still well above its pre-crisis level. The Bank has said it plans to use other tools to deal with any housing overheating before raising interest rates, and that London properties are not reflective of the rest of the country. But the data shows price rises are speeding up in other regions as well, with prices up almost 8 percent in eastern England and the East Midlands, the biggest rises since the third quarter of 2010. "While we remain of the view that UK house prices in general are not yet seeing unsustainable growth, the London market is looking particularly frothy. The onus remains firmly on the Bank to ensure that the market does not enter bubble territory," said Martin Beck, senior economic advisor to Ernst & Young. RAPID GROWTH Sterling inched up and British government bonds fell after the data, as some in the market had expected an even faster fall in inflation. Some economists also said the data highlighted a bigger issue - a growing disconnect between record-low interest rates and rapid economic growth. "If you look at the real economy, we have got growth of 2.5 percent plus this year.... Is that consistent with the lowest interest rates in the Bank's 320-year history, particularly if output goes back above pre-crisis levels as it's likely to do in the course of this year?" said Peter Dixon at Commerzbank. "It has to be careful about how it phrases the inflation story now because it might come back to haunt it at some point in the future." CPI inflation is likely to stay below target for the rest of 2014 and most of 2015, Citi said, adding it was probably close to the low. Before December last year, annual inflation exceeded the central bank's target every month since December 2009, eroding the spending power of households. But inflation has been falling sharply across Europe in recent months, with euro zone inflation also hitting its lowest in more than four years in March, at 0.5 percent. March's fall in inflation was driven by the biggest drop in the cost of fuels and lubricants - mostly petrol and diesel - since September 2009. Smaller rises in prices for clothes and household goods prices also pushed down inflation, while the rate of services inflation returned to the series' low of 2.3 percent last seen in 2009. The series began at the start of 1997. Data also released by the ONS on Tuesday showed that factory gate inflation fell to 0.5 percent - its lowest since October 2009, though slightly higher than economists' predictions of a 0.3 percent increase.