Annual inflation in Britain is expected to fall below 2% for the first time since April 2021, according to data expected to be released next Wednesday.
Official figures are forecast to show a fall in consumer price inflation (CPI) from 2.2% in August to between 1.8% and 1.9% in September. This is the first time in more than three years that inflation has fallen below the Bank of England’s 2% target. .
The expected decline in inflation is due to falling global energy prices, the resolution of post-pandemic supply chain issues, and the impact of aggressive interest rate hikes. Annual inflation has fallen steadily since peaking at 11.1% in October 2022.
Economists suggest September’s inflation rate could even be lower than the Bank of England’s forecast of 2.1%, driven by a sharp fall in energy and oil prices last month. Analysts at Barclays suggest inflation could fall to 1.7%, while Deutsche Bank points to broader energy price deflation and falling costs for food, tobacco and services, pushing inflation back to 1.8%.
Sanjay Raja, chief Britain economist at Deutsche Bank, said: “After the CPI moved sideways in August, we expect inflation to fall to a new cyclical low in September.”
This expected fall in inflation will increase pressure on the Bank of England’s Monetary Policy Committee (MPC) to consider further rate cuts. Andrew Bailey, the Bank’s governor, recently warned that rate setters may have to be “a little more aggressive” with rate cuts if inflation continues to weaken and the economy shows signs of slowing.
The UK economy has seen a marked slowdown in recent months, with GDP stagnating in June and July and growing by just 0.2% in August, compared to quarterly growth of 0.7% at the start of the year.
Konstantinos Venetis of TS Lombard said: “Inflation is falling, leaving the economy struggling to maintain momentum. The evidence that a weakness is developing is becoming clearer, pointing to the need for a boost from looser monetary policy.”
Traders now expect the Bank to cut rates twice before the end of the year, potentially pushing the base rate down to 4.5%.
However, inflation is likely to rise again in the coming months, with household energy prices rising 10% in October and oil prices rising due to tensions in the Middle East. Moreover, measures in Rachel Reeves’ upcoming budget on October 30, such as the introduction of VAT on private school fees and possible excise duties on alcohol and tobacco, could also push inflation back up.