UK inflation slows more than expected

Annual consumer-price growth dipped to 2.4 per cent from 2.7 per cent in August more than a Bloomberg survey forecasting 2.6 per cent

UK inflation fell more than expected last month. Bloomberg

UK inflation slowed more than expected in September, giving the Bank of England room to move slowly on the path of raising interest rates.

While faster pay growth may be strengthening price pressures, the uncertainty from Britain’s imminent divorce from the European Union is also undermining the economy. BOE governor Mark Carney says a limited and gradual series of rate hikes are needed to keep inflation in check, and markets expect the next move to come after the UK formally leaves the bloc in March.

If the inflation rate “falls below the 2 per cent target next year, that’s going to constrain the pace at which the BOE raises,” said Samuel Tombs, an economist at Pantheon Macroeconomics. Wednesday’s data “really weaken the case to raise interest rates again before we know what’s going to happen with Brexit.”

Annual consumer-price growth dipped to 2.4 per cent from 2.7 per cent in August, the Office for National Statistics said. The forecast in a Bloomberg survey was 2.6 per cent.

Downward pressure came mainly from food prices, which fell 0.2 per cent on the month with chocolate and meat the key drivers. There was also pressure from ferry prices, clothing and recreation and culture such as theatre tickets and computer games.

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These influences were partly offset by energy prices, with tariff hikes lifting electricity prices by 1.8 per cent.

Core inflation, which excludes volatile food, energy, tobacco and alcoholic drinks, slowed to 1.9 per cent in September.

Inflation averaged 2.5 per cent in the third quarter, in line with BOE forecasts. Signs of domestic cost pressures prompted officials to raise interest rates in August. Investors pared pared expectations for the next hike to come in May to about 65 per cent this week from close to 90 per cent last week.

The pound weakened after the data, falling 0.3 per cent to $1.3148 as of 11:15am London time.

Price growth is expected to drift down toward the 2 per cent target, giving a real-terms boost to households now enjoying the fastest wage growth in almost a decade. How quickly it gets there may depend on oil prices amid speculation that Brent crude could soon reach $100 a barrel.

“The higher wage growth than expected will matter more for the Bank of England’s outlook than the downside surprise to inflation,” said Kallum Pickering, an economist at Berenberg. “Tight labour markets plus an economy which is growing at or slightly above its potential rate suggests that the Bank of England may have to step up the pace of rate hikes next year or in the year after.”

Producer input prices rose 1.3 per cent, taking the annual rate of increase to 10.3 per cent. Output prices climbed an annual 3.1 per cent.

House prices rose just 3.2 per cent in the year through August, the weakest pace since 2013. The worst-performing region was London, where values fell 0.2 per cent.