LONDON (Reuters) - British inflation unexpectedly dropped to its lowest rate for more than a year in October, reassuring the Bank of England that it has ample time to allow the economy to strengthen before it raises interest rates.
Consumer price inflation fell to an annual rate of 2.2 percent in October from 2.7 percent in September, the Office for National Statistics said on Tuesday.
It was far lower than the BoE’s forecast in August that inflation would exceed 2.8 percent for the rest of the year, although it comfortably exceeds wage growth, meaning pressure on Britons’ living standards will continue.
The fall echoed a similar decline in the euro zone last month, although in that case it was to just 0.7 percent.
The UK number was well below economists’ average forecasts of a drop to 2.5 percent and is the lowest rate since September 2012. It was driven by falls in petrol prices and other transport costs and technical effects related to a multi-year programme of university tuition fee rises.
The BoE will publish new forecasts on Wednesday, likely to underpin its pledge to keep rates low in the foreseeable future.
“October’s inflation data suggests that the UK economy is hitting a sweet spot of accelerating growth and falling inflation,” said Capital Economics analyst Martin Beck.
“Looking forward, inflation may tick up a touch in November as some of the recent announcements of hefty increases in energy prices start to take effect. But ... underlying pressures are likely to remain subdued,” Beck added.
Sterling hit a two-month low against the dollar but British government bond prices turned positive on the day as the figures eased concerns that persistently high inflation might pressure the BoE to raise interest rates sooner than planned.
In August the BoE committed to keep rates on hold until unemployment falls to 7 percent, unless inflation threatened to get out of control. Unemployment in the three months to September was 7.7 percent.
Notwithstanding the fall, inflation has exceeded the BoE’s 2 percent target since December 2009. In March, however, Chancellor George Osborne changed the bank’s mandate so that it can take an extended period to return inflation to target if to do otherwise would significantly hurt growth.
Since then Britain’s economy has expanded rapidly and grew by 0.8 percent in the three months to September. But total output is still below its 2008 peak, in contrast with almost all other major economies.
Tuesday’s data strengthened economists’ expectations the bank will revise down short-run forecasts for inflation on Wednesday, as well as raising the growth forecast and bringing forward the date it expects unemployment to hit 7 percent.
October’s fall in inflation represented the biggest one-month drop in the annual rate of CPI since April 2012.
The ONS said it was driven by the sharpest fall in transport prices since July 2009 as well as favourable comparisons with a year earlier, when the first and most significant of several annual rises in university tuition fees took effect.
However the fall was not just driven by one-off effects. An underlying measure of inflation, which strips out increases in energy, food, alcohol and tobacco, rose by just 1.7 percent, its smallest increase since September 2009.
Data also released by the ONS on Tuesday showed that factory gate prices rose by 0.8 percent, their slowest since October 2009, compared with economists’ predictions of a 1.0 percent increase on the year.
But some economists see upward pressure on inflation over the next few months, when the impact of recently announced prices rises for household heating take effect.
House prices across Britain rose by 3.8 percent, the ONS said. This compares to annual increases of 6.9 percent and 5.8 percent recently reported for October by two of Britain’s biggest mortgage lenders, Halifax and Nationwide.
Increases were concentrated in London, where prices are 9.4 percent higher than a year earlier, while in the rest of Britain they were just 2.1 percent higher
A survey published by the Royal Institution of Chartered Surveyors showed house prices hit an 11-year high in October as new British government incentives to support the housing market boosted the number of would-be home-buyers.
Editing by Jeremy Gaunt