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Sterling falls as UK narrowly misses deflation

UK narrowly avoids deflation

The U.K. narrowly missed slipping into deflation territory in March, according to official data Tuesday, bringing relief to some economists concerned about falling prices.

The rate of consumer price inflation in the U.K. was steady at 0 percent in March from a year earlier, in line with expectations by analysts polled by Reuters. Sterling fell to a session low of $1.4618 after the data was released.

Falling consumer price growth has been attributed to the lower cost of oil and food imports.

It comes amid concerns about all-out deflationary spiral -- when prices fall and shoppers withhold purchases in the hope of further reductions, hurting the economy.

Howard Archer, chief U.K. and European economist at IHS Global Insight, noted that the March figures could have been affected by an earlier Easter holiday season this year.

"Deflation in March may well have been limited by the fact that Easter occurred right at the start of April this year rather than in the middle as was the case in 2014," Archer said in a note Tuesday. "This resulted in some of the hikes in air/sea transport and holiday prices occurring in March in 2015, whereas all the hikes occurred in April in 2014."

Simon Dawson | Bloomberg | Getty Images

However, the economy could still slip into deflation, he warned.

"Mild deflation could very well occur in April given the reduced prices during the month from the earlier Easter this year and given the ongoing weakness of food prices. Furthermore, utility price cuts are still kicking in," Archer added.

Deflation no big deal?

Derek Halpenny, European head of global currency research at Bank of Tokyo-Mitsubishi, told CNBC following the data that it wouldn't have been "too big a deal" if the U.K. had entered deflation anyway.

"The Bank of England had already clearly signaled that there was a greater chance that we would go into negative territory in the current quarter and their projections for the second quarter is flat," he told CNBC's "Worldwide Exchange."

He added that the second half of the year could see disinflationary pressures weaken somewhat.

"The outlook for the U.K. economy is still quite positive in my view, so even if we'd had a negative print today, the outlook still looks favorable for what the Bank of England is expecting."

The Bank of England's inflation target is 2 percent and the current rate of inflation has reinforced views that the bank could delay raising interest rates.

Halpenny believed that the bank's governor Mark Carney would be cautious before increasing rates amid the current inflation data.

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow us on Twitter: @CNBCWorld

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