UK inflation falls to five-year low at 1.2% in September

Inflation drop eases pressure on Bank of England to hike rates

City Staff
Tuesday 14 October 2014 12:22
Supermarkets have engaged in a fierce price war that's keeping the cost of food lower
Supermarkets have engaged in a fierce price war that's keeping the cost of food lower

Inflation fell to a five-year low of 1.2 per cent in September as the supermarket price war and lower petrol prices kept a lid on the rise in the cost of living.

The Consumer Price Index (CPI) measure of inflation dropped more sharply than expected from 1.5 per cent the month before, the Office for National Statistics (ONS) said.

Food and non-alcoholic beverages fell by 1.4 per cent year-on-year, the steepest drop since June 2002 and the fifth month in a row that they have not risen on an annual basis.

It is the longest sustained period of flat or falling food prices since the end of 2004.

The pound fell sharply today as the sharper-than-expected inflation drop meant it was less likely that the Bank of England will need to take action soon to raise interest rates from their five-year low of 0.5 per cent.

The CPI figure means that state pensions will rise by 2.5 per cent or £2.85 a week next spring as the Government's "triple lock" ensures an increase of whichever is the greater out of average earnings, September's inflation rate or 2.5 per cent.

The Bank of England targets inflation at 2 per cent but it has now been below this level for nine months in a row. Governor Mark Carney must write to the Chancellor to explain if it is more than 1 per cent higher or lower.

Low inflation removes any immediate pressure on the Bank to raise interest rates amid the continuing uncertain recovery in the wider economy.

It also eases some of the strain on household budgets - although real-terms pay is still falling, with latest figures due out tomorrow expected to show it remains below 1 per cent, lagging behind inflation.

However, policy-makers will be concerned if there is a danger of CPI becoming too low.

Ultra-low inflation in the eurozone has prompted emergency rate cuts and stimulus by the European Central Bank as it battles to stave off a damaging deflationary spiral.

Today's ONS figures showed that petrol fell by 0.8p per litre in September compared with the previous month, and diesel by 0.7p, amid tumbling oil prices.

Meanwhile, sea and air fares fell more steeply than at the same time last year, while laptops and tablets, computer games, games consoles, books and e-books also contributed to the inflation slowdown.

Restaurants, cafes and canteens saw lower price rises than in the same month a year ago.

The ONS said that were it not for the impact of falling food and motor fuel prices - the latter of which were down 6 per cent - the rate of inflation would be around a third higher at 1.6 per cent.

CPI has not been lower since September 2009, when it stood at 1.1 per cent. The Retail Price Index (RPI), a separate measure which includes housing costs, fell from 2.4 per cent to 2.3 per cent, its lowest level since November 2009.

Chris Williamson, chief economist at Markit, said the low rate of inflation could mean an interest rate hike is delayed until after next year's general election.

He pointed out that, apart from in September 2009, CPI has not been as low for a decade. It was previously only as low when it was 1.2 per cent in October 2004.

Mr Williamson said: "With oil and petrol prices falling, import costs dropping due to the exchange rate, supermarkets engulfed in price wars and wage growth at a record low, it's hard to see why inflation should do anything other than fall further in coming months,.

"This more benign inflation outlook should certainly take pressure off the Bank of England to raise rates, and could even add to calls for policy-makers to do more to shore up the recovery amid signs that growth could fade in coming months.

"While a few months ago, the likelihood was growing that the Bank might need to hike interest rates in late 2014 or early next year, the data are now stacking up to suggest a hike could be delayed at least until next summer, after the general election."

Additional reporting PA

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