UK inflation is on the verge of dropping below the Bank of England’s 2% target for the first time in over three years.
- Consumer price inflation is anticipated to decrease from 2.2% in August to as low as 1.7% in September.
- This decrease is attributed to declining global energy prices and resolved supply chain issues post-pandemic.
- The Bank of England faces mounting pressure to lower interest rates in response to the diminishing inflation.
- Future inflation might climb again due to rising energy costs and adjustments from the upcoming budget.
Official figures are anticipated to show a reduction in consumer price inflation from 2.2% in August to between 1.8% and 1.9% in September. This marks the first occasion in over three years that inflation is expected to fall below the Bank of England’s 2% target. The decline is linked to the reduction in global energy prices and the resolution of supply chain disruptions after the pandemic. Aggressive interest rate hikes have also played a role in this decline.
Annual inflation has been decreasing since its peak at 11.1% in October 2022. Economists project that September’s inflation may fall lower than even the Bank of England’s forecast of 2.1%, due to significant reductions in energy and oil prices the previous month. Analysts from Barclays project a decrease to 1.7%, while Deutsche Bank predicts inflation at 1.8%, influenced by deflation in energy prices and reduced costs for food, tobacco, and services. Sanjay Raja, chief UK economist at Deutsche Bank, remarked, “After headline CPI moved sideways in August, we expect inflation to drop to a new cyclical low in September.”
This expected decline in inflation is likely to intensify pressure on the Bank of England’s monetary policy committee (MPC) to consider further interest rate reductions. Andrew Bailey, Governor of the Bank, has indicated that a more aggressive approach may be necessary if inflation continues to weaken alongside a slowing economy. The UK economy has experienced a marked slowdown, with GDP remaining stagnant in June and July, and growing by only 0.2% in August, a sharp decline from the 0.7% quarterly growth observed at the start of the year. Konstantinos Venetis from TS Lombard noted, “Inflation is settling lower, leaving the economy struggling to maintain momentum. Evidence of a soft patch taking shape is becoming clearer, pointing to the need for a shot in the arm from looser monetary policy.”
Market traders foresee the possibility of the Bank reducing interest rates twice before the year concludes, potentially reducing the base rate to 4.5%. However, there are concerns that inflation could rise once more in the coming months. This is due to an anticipated 10% increase in household energy prices in October and escalating oil prices driven by geopolitical tensions in the Middle East. Moreover, upcoming budget measures proposed by Rachel Reeves, including the introduction of VAT on private school fees and potential duties on alcohol and tobacco, could contribute to a rise in inflation.
The anticipated dip below 2% indicates shifting economic conditions and necessitates responsive monetary policies from the Bank of England.
