Inflation falls to 12-month low in the UK

Inflation falls to 12-month low in the UK

Inflation fell to its lowest level in the UK for more than a year in October, plunging to 2.2%, official figures showed today.

A petrol pump price war that saw 4.9p cut from a litre of fuel, together with a smaller contribution for tuition fees, helped the Consumer Prices Index (CPI) rate fall from 2.7% in September.

The sharper-than-expected drop took CPI to a level not seen since September 2012, figures from the Office for National Statistics (ONS) showed. It has not been lower since November 2009.

The figures will ease pressure on the Bank of England as it strives to meet its inflation target of 2%, and ponders the outlook for its flagship low-interest rate policy.

Recently-announced energy price hikes of around 9% have yet to take effect and are likely to have an upward impact on the rate later this year.

A separate measure of inflation, the retail prices index (RPI), fell from 3.2% in September to 2.6% in October.

The ONS said transport prices overall fell 1.5% month-on-month in October with the main contribution coming from fuel price cuts at many major supermarket chains as wholesale prices fell.

There were also downward contributions from air fares and prices for secondhand cars.

In education, the impact of rising tuition fees was smaller than at the same time last year because many students were already paying the higher rate.

Food inflation fell from 4.8% to 4.3%, easing some pressure on household costs.

An experimental measure of inflation, CPIH, which includes housing costs, fell from 2.5% to 2%. Another experimental measure, RPIJ, fell to 1.9% from 2.5% in September.

The figures, which were seen last week by Bank of England policymakers, come 24 hours before the Bank publishes its quarterly Inflation Report.

A lowering of inflation expectations will build confidence about the future of historically-low 0.5% interest rates set out in the Bank’s forward guidance policy – which is conditional on the rise in the cost of living remaining under control.

However, the pledge not to consider raising rates until unemployment drops to 7% means that a widely expected improvement in the Bank’s outlook for jobs will be seen as bringing an end to the low rate closer.

Martin Beck, UK economist at Capital Economics, said: “October’s inflation data suggests that the UK economy is hitting a sweet spot of accelerating growth and falling inflation.

“Looking forward, inflation may tick up a touch in November as some of the recent announcements of hefty increases in energy prices start to take effect.”

But he said suggestions that the Government could take action to address energy price hikes, coupled with subdued underlying price pressures meant there was little risk of the Bank’s inflation “knockout” to forward guidance being triggered soon.

Howard Archer, of IHS Global Insight, said the inflation fall provided some much-needed relief for consumers but pointed out that it was still running at more than three times the latest annual wage growth rate of 0.7% – which means pay in real terms continues to fall.

He added that it was likely to have only a limited impact on the Bank of England’s view on interest rates, with the primary focus on jobs and the state of the economy.

Chris Williamson, chief economist at Markit, said: “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.

“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.”

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