Sharp fall in inflation as food and petrol prices dive

The rate of inflation in Britain fell further than expected in October as the sharp drop in the price of petrol and food helped push the consumer prices index back towards its target level.

The CPI fell to 4.5 per cent last month, down 0.7 percentage points from the 16-year high of 5.2 per cent in September. Economists had only predicted a 0.5 percentage-point fall to 4.8 per cent.

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The retail prices index, which also includes items such as council tax and mortgage interest payments, fell from 5.0 to 4.2 per cent over the month – its biggest monthly fall since January 1993.

The Office of National Statistics said that the lower oil price, which reduced petrol costs, was the main reason for the sharp fall. The average price of a litre of unleaded petrol fell by 7.1p between September and October.

A slowdown in the growth of food prices also contributed. Meat inflation fell to 14.3 per cent in October compared to 19.1 per cent in September.

The Bank of England is mandated with getting the rate of inflation as measured by the CPI back below 2 per cent – a goal which economists believe will now be quickly achieved.

"Inflation is poised to drop like a stone over the coming months due to sharply lower oil and commodity prices, waning food prices, favourable base effects and rapidly diminishing underlying inflation as the economy contracts and unemployment rises," said Howard Archer, the chief UK economist for the consultants Global Insight.

"We expect annual consumer price inflation to fall to just 0.5 per cent by the end of 2009. Furthermore, a brief period of deflation is possible. It does seem particularly likely that headline retail price inflation will go into negative territory in 2009 due to sharply lower interest rates."

The Bank of England surprised the market by cutting interest rates by 1.5 percentage points at the start of this month, despite the previous inflation figures being well above target. However, if inflation continues to fall at its current rate, it is likely that further cuts will follow over the coming months.

"We believe that a 50 basis-point interest rate cut from 3.0 to 2.5 per cent is the absolute minimum that the Bank of England will deliver next month," Mr Archer said. "Furthermore, interest rates seem ever more likely to fall as low as 1 per cent in 2009."

Union chiefs urged the Bank to follow through with interest rate cuts while calling on the Government to do all it could to help businesses. Brendan Barber, the TUC general secretary, said: "It is good news that inflation is coming down, but this drop in prices is also a sign of how rapidly the economy is shrinking. The Government must investigate urgently every method to get the banks lending again. Otherwise, lower interest rates will do nothing to save jobs and businesses."

Although broad measures of inflation have been falling, consumer groups pointed out that inflation remains high for some people, particularly the elderly. Alliance Trust said that the average rate of inflation for people aged over 75 was 7.1 per cent in October, mainly due to the higher costs of electricity and gas. In contrast, under 30s have a lower rate of inflation, of just 4.2 per cent.