UK Inflation Slows Sharply

By Andy Bruce and William Schomberg
(Reuters) – British inflation slowed sharply last month and key price gauges watched by the Bank of England (BoE) also fell, bolstering bets on a November interest rate cut and helping finance minister Rachel Reeves before her first budget.

Inflation Figures

Annual consumer price inflation eased to 1.7% in September from 2.2% in August, the lowest reading since April 2021, driven down by lower airfares and petrol prices, according to the Office for National Statistics.
A Reuters poll of economists had pointed to a reading of 1.9%.

Currency Impact

Sterling fell by four-fifths of a cent against the U.S. dollar and fell sharply against the euro too. Interest rate futures showed investors saw a 90% chance of two BoE quarter-point rate cuts by the end of the year, up from 80% on Tuesday.

Martin Swannell, chief economist adviser to EY ITEM Club consultancy, noted, "Today's release removes another potential obstacle to the Monetary Policy Committee voting for a 25bps rate cut at its November meeting."
He added, "The key question now is whether the MPC will step up the pace of rate cuts at subsequent meetings, requiring more good news on pay growth and inflation."

Pay Growth and Economic Outlook

Data showed British pay grew at its slowest pace in over two years in the three months to August, with vacancies falling again. The finance ministry welcomed the drop in inflation, providing a favorable backdrop for Reeves as she prepares her first budget, due on October 30.
A less inflationary outlook would improve the economic and fiscal outlook for the budget, aiding Reeves in finding extra money for public services and infrastructure.

Core and Services Inflation

Core inflation, which excludes energy, food, alcohol, and tobacco, slowed to 3.2% from 3.6% in August. Services inflation, viewed as key by the BoE, decreased to 4.9% in September, down from 5.6% in August. This drop was due to a significant plunge in airfares.

Despite the decrease, the BoE expected services inflation to fall below 5% this year in forecasts published in August. The overall fall in inflation may provide Reeves extra flexibility for her budget plans, but it disappointed some social benefit recipients.

Factory Prices

Additionally, prices charged by factories for their goods fell by 0.7% in the year to September, marking the largest decline since October 2020 during the COVID pandemic.