Inflation in the United Kingdom experienced a significant decline to 1.7% in September, as reported by the Office for National Statistics on Wednesday. This decrease was unexpected, as economists surveyed by Reuters had predicted a higher rate of 1.9% for the month. This marks the first time the headline rate has fallen below the Bank of England’s 2% target since April 2021. For the past four months, inflation has been hovering near this level, having been recorded at 2.2% in August.
Core inflation, which does not include energy, food, alcohol, and tobacco, also saw a decline to 3.2% in September, down from 3.6% in August, and fell below the 3.4% forecast by Reuters. In the services sector, which comprises the largest portion of the UK economy, price increases slowed considerably to 4.9% last month from 5.6% in August, reaching the lowest rate since May 2022. Core and services inflation are critical factors for the Bank of England’s policymakers as they consider the possibility of reducing interest rates again in their November meeting.
As of Wednesday morning, market predictions indicated an 80% likelihood of a rate cut in November following the latest inflation report. Analysts pointed out that data on lower wage growth reported by the ONS earlier this week had strengthened the case for a rate reduction. The Bank of England had previously lowered its key rate by 25 basis points in August, followed by holding steady in September.
After the announcement, the British pound experienced a decline, suggesting more dovish expectations for the Bank of England. Sterling decreased by 0.5% against the U.S. dollar to $1.301, and the currency fell 0.38% against the euro. Suren Thiru, the economics director at the Institute of Chartered Accountants in England and Wales, noted that these figures provide reassurance of a shift towards a more moderate inflation environment in the UK, helped by lower fuel prices. Thiru highlighted that the notable drop in services inflation suggests that underlying price pressures are becoming less persistent.
However, Thiru cautioned that British inflation might rise again in October due to an increase in the energy price cap set by regulators. The Bank of England is expected to wait and evaluate the potential inflationary impact of the UK Labour government’s upcoming budget, set to be announced at the end of the month, before making any definitive policy decisions.
