UK inflation unexpectedly falls in September

Inflation unexpectedly eased in September, providing relief for under-pressure consumers and significantly reducing the prospect of an imminent interest rate hike.

The Office for National Statistics said that the consumer price index rate of inflation was 2.4% last month, down from 2.7% in August. Most analysts had pencilled in a rate of around 2.6%.

Food prices were one of the main drags, down 0.1%, compared to an 0.8% rise a year ago.

Mike Hardie, head of inflation at the ONS, said: “Food was the main downward pull on inflation as last year’s September price rises failed to reappear, while ferry prices dropped after their surprisingly high summer peak. However, it wasn’t all one-way traffic, with energy suppliers pushing up their prices.”

The CPIH rate of inflation, which includes owner-occupier housing costs, was also lower, at 2.2% against 2.4% in August.

Coupled with official data published on Tuesday, which showed the strongest wage growth for British workers for nearly a decade, Wednesday’s inflation figures will provide some relief for UK consumers.

It will also ease the pressure on the Bank of England to raise interest rates quicker than it would prefer. The Bank needs to keep inflation under control but the Monetary Policy Committee is conscious levels of personal debt remain high.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The slump in CPI inflation in September, after August’s surprise jump, substantially eases the pressure on the MPC.

“CPI inflation likely will only edge down to 2.2% by the end of this year, as more price increases by energy suppliers offset further declines in food and core goods inflation. But energy’s contribution to inflation should fall suddenly by 0.2 percentage points around the turn of the year, when Ofgem introduces its cap on standard variable tariffs.

“So unless services inflation strengthens markedly over the next six months, CPI inflation will undershoot the 2% target. Below-target inflation won’t rule out rate hikes altogether, but it will ensure that the MPC can stick to its plans for more gradual increases in interest rates than in past tightening cycles.”

The EY ITEM Club called the figures “welcome news for consumers”. Howard Archer, the economic thinktank's chief economic advisor, added: “While inflation most likely peaked at 2.7% in August, we expect it to remain sticky in the near term with upward pressure coming from recent higher oil prices and the weaker pound. There is also an upside risk to food prices from the heatwave in the UK and Europe following on from the severe weather in the first quarter.

“Firms remain generally keen to limit their total costs in a challenging and uncertain environment. Fragile consumer confidence will probably deter workers from pushing hard for markedly increased pay rises, despite higher inflation and a tight labour market."

The ITEM Club expect consumer price inflation to drop to 2.3% by the end of 2018 and to 2% by mid-2019.

The pound is expected to remain under pressure, however, as critical talks about the UK’s withdrawal from the European Union re-open in Brussels today.

David Lamb, head of dealing at Fexco Corporate Payments, said: “Just a month ago inflationary pressure was a real concern, and the Bank of England’s hawks were muttering about the next interest rate coming sooner rather than later. But with that inflationary pressure easing so dramatically the Bank can rest easy, and all talk of rate rises will be booted deep into 2019.

"The pound has softened further as a result, and settled back into its pattern of uneasy calm as the markets try to second guess whether the EU summit will deliver an unlikely Brexit breakthrough or derail the already fragile negotiations entirely.”

Sterling was trading down 0.2% €1.14 at 10.30 BST and down down 0.3% at $1.3139.