The pace of increase in prices charged at the factory gate faded last month to its lowest for just over a year.
Analysts said, however, that the favourable inflationary outlook was not enough in itself to guarantee a further reduction in interest rates.
Scope for a fourth reduction in base rates since December was made less likely by more signs yesterday of a pick-up in the economy.
As well as upbeat surveys from retailers and estate agents, official figures due to be released before the next monetary meeting between Chancellor Kenneth Clarke and Eddie George, Governor of the Bank of England, on 8 May will be decisive. These include the unemployment count tomorrow, retail sales next week and the initial estimate of first-quarter GDP.
"Lower inflation is unlikely to be enough to trigger a further cut given signs that real activity is picking up," Michael Saunders, an economist at City investment bank Salomon Brothers, said.
Manufacturers raised prices by a modest 0.2 per cent in March, bringing the annual rate of increase down to 3.4 per cent from 3.7 per cent. "Core" prices, excluding food and energy products, were flat.
The sharpest slowdown in factory gate prices is occurring in industries which saw the fastest increases last year, including pulp and paper, chemicals, rubber and plastics.
Prices charged for food climbed 1.2 per cent last month. A decline of 0.9 per cent in beef prices, concentrated towards the end of the month, was offset by a jump of 3.6 per cent in other meat prices.
A surge in food and oil prices took the prices paid by manufacturers for materials up 0.5 per cent in March. The year-on-year rate of increase remained unchanged at 2.8 per cent, the lowest for more than a year and a half. Of this 12-month rise, four-fifths was due to increased oil and food costs.
Despite the disappointing rise in materials prices last month due to these commodities, most City economists remain very optimistic about the trend in inflation.
A sharp fall in the best indicator of short-term trends, the annualised three-month rates of "core" factory gate inflation, from 1.7 per cent to 1.0 per cent pointed to further declines in the headline figures.
"As the year progresses, the easing in producer price inflation should begin to be reflected in an improvement in underlying retail price inflation," David Walton of Goldman Sachs, said. Retail prices usually follow factory gate prices with a lag of about six months.
Few analysts think higher oil and food prices will last, as they reflect temporary disruptions to supply and low levels of oil stocks after the harsh winter. The futures market is already pointing to lower oil prices by the summer.Reuse content