UK Inflation Drops Sharply to Two-Year Low
In a surprising turn of events, the UK saw a significant drop in inflation, falling to 4.6% in October from 6.7% the previous month, reaching a two-year low. This decline, in part, caused the headline consumer price index to remain flat on a monthly basis, a result that was not expected by economists.
Core CPI, which excludes volatile food, energy, alcohol and tobacco prices, also fell to an annual 5.7% in October from 6.1% in September, contributing to the overall decrease in inflation. The Office for National Statistics revealed that the largest downward contribution came from housing and household services, with the annual rate for CPI hitting the lowest since records began in January 1950. Additionally, food and non-alcoholic beverages also played a part in the easing of inflation, with the annual rate experiencing its lowest since June 2022.
The Bank of England, after ending a run of 14 straight interest rate hikes in September, left its benchmark interest rate unchanged at 5.25% earlier this month. This was in line with their efforts to bring inflation back down towards the Bank’s 2% target.
The drop in inflation was deemed good news for Downing Street, following Prime Minister Rishi Sunak’s commitment to halving UK inflation back in January, when the annual CPI rate was running above 10%. This steep drop suggests that the UK has “turned the corner” in its battle against inflation, according to Suren Thiru, economics director at ICAEW. However, he attributed the halving of inflation to falling energy costs and rising interest rates rather than government action.
Market bets are strengthening for the central bank to leave rates on hold at its December meeting, especially after the print on Wednesday. While the Monetary Policy Committee will want to see more evidence of slowing inflation across the economy, some experts believe that further progress towards the 2% target is likely to be relatively slow.
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