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UK inflation sinks to 4-year low

U.K. inflation sunk to its lowest level in more than 4 years in February, dipping further below the Bank of England's 2 percent target, as fuel prices fell.

Consumer prices rose 1.7 percent year-on-year, in line with expectations and down from 1.9 percent in January, easing the price pressure on household incomes, the U.K's Office for National Statistics (ONS) said.

The ONS also said house prices in the U.K. surged 6.8 percent in the year to January 2014, up from 5.5 percent in December last year. In London, where the property prices continually hit record highs, the cost of housing soared by 13.2 percent year-on-year.

(Read more: UK finance minister pledge sends homebuilders soaring)

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The gap between inflation and average wage growth is now the smallest since April 2010.

Transport costs made the biggest downward contribution to the inflation rate, driven by falling petrol and other fuel prices, according to the ONS.

"The general expectation is that inflation is likely to continue to run at or below the Bank of England's 2 percent target for some time, subdued by lower import costs, resulting in turn from sterling's appreciation this year, as well as lower global commodity and energy prices," said chief economist at Markit, Chris Williamson.

"This means policy-makers have greater leeway to keep interest rates at the record low of 0.5 percent for longer, as the economy goes through a 'sweet spot' of robust economic growth, falling unemployment and low inflation," he said.

(Read more: Bubble alert? UK house prices rise to 6-year record)

Household services including the price of gas and electricity overall also rose less than a year ago following the introduction of Energy Companies Obligation scheme this year.

Petrol prices dropped by 0.8 pence per liter between January and February this year, compared with a 4 pence rise in the same period a year ago.

Sterling hit a session high against the dollar after the news.

Rates strategist at Monument Securities, Marc Ostwald said the downward trend for food, clothing and footwear, utilities and fuels was expected but that was offset by a "sizeable upward shift" in furniture & household equipment.

"Much of this can be laid at the door of the 'booming' housing market, with a smaller contribution from health. This is not, per se, something for the (Monetary Policy Committee MPC) to react to, however it should heighten their sensitivity to housing market trends," he said.

(Read more: A Victorian solution to London's housing crisis?)

Property asking prices rose to a new record high in March, with average asking prices reaching £552,530 ($917,714) in London. That is £8,298 above the capital's previous high, reached last October according to property website Rightmove.

The boom in the U.K. housing market has fueled further concerns that the country's housing market is trapped in a bubble, as supply and demand imbalances persist.

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