Falling energy prices pushed down UK inflation to its lowest level in three years in October, prompting fresh speculation about whether the Bank of England will cut interest rates in a subdued economy.
Prices last month were 1.5 per cent higher than the same period last year, falling from 1.7 per cent in September, according to the Office for National Statistics, and lower than the consensus forecast of 1.6 per cent. The Bank of England’s long-term target is 2 per cent.
“A fall in utility prices due to a lowering of the energy price cap helped ease inflation in October,” the ONS said.
Ofgem lowering the price cap for energy resulted in gas prices falling by 8.7 per cent and electricity prices by 2.2 per cent, but these declines were offset slightly by increases in clothing prices.
Core inflation, which excludes volatile prices such as those of food, energy and alcohol, was unchanged at 1.7 per cent.
Last week, the Bank of England’s Monetary Policy Committee indicated it could be prepared to cut rates if the economy continued to slow.
Although it voted to leave interest rates unchanged, the decision was not unanimous for the first time since 2018.
The bank’s November forecast said inflation would fall sharply to about 1.25 per cent in the spring of 2020, as a result of planned cuts in water and energy bills.
It then expects inflation to rise to a little over 2 per cent by the end of 2022.
Howard Archer, chief economic adviser at the EY Item Club, said October’s dip in inflation would “likely fan expectations that the Bank of England will cut interest rates before too long”.
Domestic inflation pressures were likely to continue to be limited, he said, as muted UK growth “constrained companies’ pricing power”.
Data published this week showed that the jobs market cooled in the three months to September, with the number of people in employment falling by 58,000 compared with the previous three months, the largest decline in more than four years.
Separate statistics showed the UK economy narrowly avoided recession in the third quarter, with annual growth of 1 per cent the slowest since 2010.
Other commentators warned against reading too much into falling consumer prices, however.
Ruth Gregory, senior UK economist at Capital Economics, a consultancy, said the fall in inflation would be “unlikely to move the dial” on interest rates.
October’s low inflation, she said, was in line with Bank of England forecasts and because of the strong pull of energy prices was “not a reflection of a weakening in underlying inflationary pressures”.
In the year to September, growth in house prices remained unchanged, with prices rising by 1.3 per cent on average. At the same time, mortgage transaction volumes for first-time buyers overtook those for owner occupiers, as some new buyers took advantage of lower prices in some areas that dissuaded current owners from moving home.
