CPI inflation falls to 2.2% in October easing speculation of a rate rise

12th November 2013

Inflation has fallen back to 2.2% bringing the Bank of England much closer to its 2% target. The headline Consumer Price Index rate fell to 2.2% in October compared with 2.7% the previous month as Reuters reports.

The fall defied economists’ expectations which had suggested the rate might be around 2.5% though inflation still remains far ahead of wages.

Factors such as cheaper transport prices and the fact that tuition fees began to drop out of the inflation picture also had an impact.

A separate but increasingly unloved measure of inflation, the retail price index (RPI), fell from 3.2% in September to 2.6% in October.

Inflation has exceeded the Bank’s supposed target level since 2009. It may ease the pressure to increase interest rates. Many commentators had suggested the mini-boom could see the MPC come under pressure despite its forward guidance policy suggesting that rates would remain low for some time.

The impact on currency markets was immediate though experts suggest it may be short-lived.

Sterling dropped to $1.5854 after the data was released from $1.5920.

Andy Scott, associate director at foreign currency specialists HiFX  says: “Since issuing the new forward guidance in the summer, investors have been betting that interest rates will need to be increased earlier than 2016 which the BoE have estimated as a timeline for when they feel rates may need to be increased. This has in part been why sterling has been performing slightly better through the second half of this year than the first, trading towards the upper end of its 2013 ranges against the euro and the dollar.

“Slower price increases should help boost consumer spending if it’s maintained as individuals won’t see the same erosion of their lacklustre earnings growth, which have seen wages falling slightly in real terms over the past few years. We’ll get an updated outlook on inflation and the economy from the Bank of England tomorrow morning which should give a clearer picture on what they feel the implications the improving economic picture means for interest rates.

“Whilst in the short term this is slightly sterling negative, it is another positive overall for the economy and the impact on sterling should be fairly short lived.”

Azad Zangana, European Economist at Schroders said:  “According to the ONS, UK annual consumer price index (CPI) inflation fell from 2.7% in September to 2.2% in October – representing the fastest fall in the annual comparison since June 2011. The slowdown in inflation was largely caused by recent falls in the prices of petrol and diesel, but also a smaller rise in education tuition fees this year compared to last.

“When excluding the impact of volatile components such as food, energy and alcoholic beverages, the ‘core’ rate of inflation has fallen to 1.7%, which is its lowest levels since September 2009.

“We have been anticipating falls in the inflation rate for a while, although the larger than expected fall this month took us and the market by surprise. The lower than expected inflation rate should help allay fears that the Bank of England will be considering raising interest rates in the near future. While the unemployment rate is falling faster than the Bank had expected, inflation is also falling at a faster pace too.”

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