Rise in the cost of living was just 2.2% in October, helped by falls in petrol prices, down from 2.7% in September
Inflation has dropped to its lowest rate in more than a year, catching financial markets offguard and scaling back bets that interest rates in the UK will rise any time soon.
The rise in the cost of living was just 2.2% in October, down from 2.7% in September as measured on the consumer price index (CPI). That was well below City economists’ forecasts for 2.5% and almost back at the Bank of England’s government-set target of 2%.
The fall was driven by cheaper fuel prices and less chunky rises in university tuition fees than this time last year, the Office for National Statistics (ONS) said. However, economists were quick to warn that with energy price hikes on the horizon and average wage growth at just a third of inflation, or 0.7%, consumers would continue to suffer major strains on their budgets.
The government was quick to welcome the news, while experts said the fall, together with a drop in the less volatile core measure of inflation to a four-year low, was good news for the UK’s nascent recovery.
“The easing in the rate of inflation and underlying price pressures will provide greater scope for monetary policy to be kept looser for longer and thereby helping ensure a sustainable upturn in the economy,” said Chris Williamson, chief economist at data specialists Markit.
“Lower inflation reduces the risk of the Bank of England having to hike rates earlier than it may otherwise prefer to, allowing policy to focus on stimulating growth rather than warding off rising inflationary pressures.”
The surprise drop in inflation pushed the pound down against other currencies, hitting a two-month low against the dollar at $1.585 with traders forced to scale back their bets that the Bank would have to raise interest rates sooner than it had pledged. Inflation was even lower than the Bank itself had been forecasting and policymakers are likely to change their outlook at their quarterly inflation report on Wednesday. .
Economists said that while energy bill hikes could push inflation back up, it was unlikely inflationary pressures would force the BoE to abandon the path it has set out for low interest rates under recently introduced forward guidance. Under that scheme, policymakers said they will not consider raising interest rates from the record low of 0.5% until at least a threshold of 7% unemployment. Unemployment was 7.7% in the latest data.
“October’s appreciable retreat in inflation will be welcomed by the Bank of England and it seemingly dilutes the risk that the knockout clauses to its forward guidance could be triggered,” said Howard Archer, economist at IHS Global Insight, adding that the Bank is most likely to start raising interest rates “in the latter months of 2015”.
Experts said the Bank would also take reassurance from other measures of inflation that suggested so-called “pipeline pressures” from manufacturers’ costs were easing as well as the less volatile cost of living indicators.
Core inflation, which excludes volatile items such as energy, food, alcohol and tobacco, eased to 1.7% from 2.2%, the slowest pace since 2009. Factory gate prices rose just 0.8%, also the slowest inflation for four years, according to separate ONS data released this morning.
The inflation slowdown was welcomed by the Treasury, which is putting the final touches to its latest round of budget measures in early December’s autumn statement.
“Inflation has fallen to well below half of its 5.2% peak. With the help of the ongoing freeze in fuel duty that has kept petrol prices 13p per litre lower than they otherwise would have been, petrol prices are now at their lowest level since July 2012,” said the Treasury spokesperson.
“Britain’s hard work is paying off and the country is on the path to prosperity. Thanks to the government’s long-term economic plan, all parts of the economy are growing, the deficit is falling and jobs are being created.”
Catherine McKinnell, Labour’s shadow economic secretary to the Treasury, said that with prices still rising much faster than wages “the cost-of-living crisis under David Cameron continues. And with inflation-busting hikes in energy prices in the pipeline families and pensioners will carry on feeling the squeeze.”
Annual price rises: October 2012-October 2013
Food and drink +3.9%
Alcoholic drink and tobacco +5.4%
Clothing and footwear +1%
Housing, water and utilities bills +4.1%
Furniture, household equipment and maintenance +1%
Recreation and culture +0.7%
Restaurants and Hotels +2.8%
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