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LONDON (Reuters) - British inflation held steady in March at its highest level since last May, keeping up the pressure on households, and the International Monetary Fund sharply cut its growth outlook for the country.
Annual consumer price inflation held at 2.8 percent, the same as in February and above the Bank of England's 2 percent target, although Chancellor George Osborne has given the bank leeway to focus more on growth and allow some inflation overshoots.
The International Monetary Fund downgraded Britain's growth outlook more sharply than any other major advanced economy in its half-yearly economic forecast update, and urged Osborne to consider looser budget policy.
"In the United Kingdom, where recovery is weak owing to lacklustre demand, consideration should be given to greater near-term flexibility in the fiscal adjustment path," it said.
Britain's Conservative-led coalition government has made deficit reduction its central policy and the IMF's latest comments were seized upon by the opposition Labour Party to argue that it was now time to change course.
"It was a serious mistake for George Osborne to totally ignore the IMF's calls for a reassessment of fiscal policy," said Labour's finance spokesman, Ed Balls.
The government aims to reduce the country's budget deficit to 6.8 percent of annual economic output this year, down from 7.4 percent in the financial year that ended in March.
Previously, the IMF had said looser budget policy would be needed in Britain if growth failed to pick up in early 2013. On Tuesday it forecast growth of just 0.7 percent this year and 1.5 percent in 2014 - cuts of 0.3 percent for each year.
Britain's finance ministry said the IMF growth downgrade reflected a weaker international environment.
"Today's report ... highlights the risks that continue to face economies around the world. Though the UK is forecast to have stronger growth than either France or Germany in 2013, difficulties in the euro area are still creating economic headwinds," a spokesman said.
Weak consumer demand is also a major factor slowing growth, and the data on Tuesday showed inflation continuing to run at more than twice the average pace of wage increases.
The Bank of England expects inflation to exceed 3 percent later this year, and many economists agree, seeing upward pressure from food prices, water and energy bills and the effect of sterling's sharp fall earlier this year.
But Tuesday's data included signs of easing price pressures in some quarters. Manufacturers' crude oil input costs dropped at the fastest annual rate since July and costs for metals imports also fell.
"I do think you are going to see some increases in inflation over the course of the next three or four months ... (but) we've seen lower oil prices and that could actually limit the peak in inflation," said Deutsche Bank economist George Buckley.
Sterling and bond prices did not move after the data.
The Bank will publish new inflation forecasts next month, and some economists think this could help break the deadlock at the central bank over whether to restart its programme of asset purchases to help Britain's stagnant economy.
"With the marked retreat in oil and commodity prices currently diluting the upside risks to consumer price inflation, it looks ever more likely that the Bank will sooner or later undertake more stimulative action," said Howard Archer of IHS Global Insight.
The central bank's policymakers split 6-3 last month on whether to buy more British government bonds, some concerned about an inflation forecast that currently sees inflation above target until early 2016.
The Office for National Statistics said that the overall price shifts in Tuesday's consumer price inflation data were modest. Higher prices for books, digital cameras and car insurance were offset by lower inflation for sofas, armchairs, petrol and diesel.
Core consumer price inflation - which strips out energy, food, alcohol and tobacco prices - climbed to 2.4 percent, the highest since December.
Factory gate prices rose by an annual 2.0 percent, in line with economists' forecasts and the smallest increase since July.
Additional reporting by William Schomberg, Editing by Jeremy Gaunt