UK headline inflation dropped to 1.7% in September, falling beneath the Bank of England’s target for the first time in two and a half years. Moreover, core consumer price inflation, which excludes energy, food, alcohol and tobacco, fell to 3.2%, down from 3.6% in August.
The most notable contributor to this was transport prices, which slid by 2.4% in September, the largest decline in the sector since October 2015. This mostly offset the rising prices of food and alcoholic beverages.
Another factor could be the impending Budget, which is expected to be harsher than those in recent years, which could be keeping consumer confidence low and causing cash to remain on the sidelines. With less demand, this would also lower inflation.
The news has strengthened expectations of further interest rate cuts from the Bank of England in November, according to Aaron Hussein, global market strategist at JP Morgan Asset Management, said.
“Today’s inflation print will reassure members of the Monetary Policy Committee that the tide is turning in the battle against inflation. This, coupled with yesterday’s further moderation in wage growth, suggests that the Bank is gradually taming the inflation tiger.”
Danni Hewson, head of financial analysis at AJ Bell, added: “A quarter percentage point cut is pretty much nailed on, and expectation of a second rate cut in December has also jumped up today with markets thinking there’s a better than 80% chance we will end the year with rates down at 4.5%.”
However, some experts remain cautious about the prospect of a second rate cut in December. Services inflation remains persistently high and so Hewson said that “there are no guarantees” on the direction of monetary policy. Cutting interest rates too quickly could risk reigniting inflation.
Hussein said: “Investors expecting the Bank to keep pace with its peers around the world are likely to be disappointed.’