Inflation falls to five-year low

14th October 2014

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The UK inflation rate fell to a five-year low of 1.2% in September, from 1.5% the previous month, pushing back expectations of an interest rate rise.

Official figures show the Consumer Prices Index dropped to its lowest level since September 2009 on lower energy prices, food and transport costs.

The announcement pushed the pound lower as it makes it less likely that interest rates will rise next spring, has had been previously forecast.

The Bank of England is tasked with keeping inflation close to its target rate of 2%.

Howard Archer, chief UK and European economist at IHS Global Insight, said: “Consumer price inflation of just 1.2% in September advances the mounting case for the Bank of England to hold off from raising interest rates until well into 2015, rather than in the first quarter.”

He added: “September’s muted consumer price inflation is particularly good news for consumers’ purchasing power as they currently continue to be hampered by very low earnings growth.

“Indeed, even consumer price inflation of 1.2% in September is still double earnings growth (just 0.6% in the three months to July).  While data out tomorrow is likely to show that earnings growth picked up in August, the increase is likely to have been limited again.”

The current weakness of oil prices and the supermarket pricing war  means that, consumer price inflation could get down to 1% in the near term, said Archer. “We now expect inflation to hover in a 1.0-1.5% range through to the early months of 2015 before gradually heading up to be near 2.0% by the end of next year.”

Chris Williams, chief executive of Wealth Horizon, said: “The ongoing fall in inflation is prompting a stay of execution for those borrowers who have been anticipating a potential rise in interest rates.  The MPC are likely to keep a keen eye on the housing market and inflation expectations data to ensure that any hike in interest rates is not delayed too long.

“Savers have a different problem, those that delay and continue to keep their money locked into savings account, will still be seeing their money rot away in low paying savings accounts. Even small pots of money need to be rounded up and put to better use by utilising a long term investment that can offer real returns.”

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