The UK is poised for a significant economic shift as inflation is expected to drop below the Bank of England’s 2% target for the first time in over three years.
- Official figures indicate a decline in consumer price inflation, driven by falling energy prices and resolved supply chain issues post-pandemic.
- Economists suggest a potential drop to 1.7%, which could prompt the Bank of England to consider interest rate cuts.
- Despite recent GDP growth, the economy remains sluggish, necessitating potential policy shifts.
- Future inflation may rise again due to upcoming policy changes and global market pressures.
UK inflation is poised to dip below the Bank of England’s 2% target, marking a significant economic development not seen in over three years. The expected decrease in consumer price inflation (CPI) from 2.2% in August to between 1.8% and 1.9% in September highlights a positive trajectory largely attributed to declining global energy prices and the resolution of supply chain disruptions following the pandemic.
Economists have speculated that the inflation rate could reach as low as 1.7%, spurred by substantial drops in energy and oil prices. Analysts from Barclays highlight this potential dip, while Deutsche Bank analysts point to broader energy price deflation and reduced costs in food, tobacco, and services as factors pushing inflation to possibly fall to 1.8%. Sanjay Raja, the chief UK economist at Deutsche Bank, stated, “After headline CPI moved sideways in August, we expect inflation to drop to a new cyclical low in September.”
This condition places increased pressure on the Bank of England’s Monetary Policy Committee (MPC) to contemplate further reductions in interest rates. Governor Andrew Bailey has indicated that a more aggressive approach to interest rate cuts might be necessary should inflation continue its downward trend, especially as economic growth remains lacklustre.The UK economy has shown a slowdown in growth over recent months, with GDP stagnating during the summer and rising only by 0.2% in August, compared to a 0.7% quarterly growth earlier in the year.
Despite this, a potential rebound in inflation looms as household energy prices are expected to rise by 10% in October, influenced by geopolitical tensions affecting global oil prices. Furthermore, the upcoming budgetary measures, such as the introduction of VAT on private school fees and potential duties on alcohol and tobacco from Rachel Reeves’ budget later this month, could catalyse an inflation increase.
Market traders anticipate that the Bank of England may need to implement two interest rate cuts before the year’s end, possibly bringing the base rate down to 4.5%. Konstantinos Venetis of TS Lombard commented that inflation’s current trajectory might necessitate a ‘shot in the arm’ from looser monetary policy to prevent the economy from faltering further.
The anticipated drop in inflation presents both opportunities and challenges, necessitating careful economic and policy management.
