UK inflation is projected to dip below the Bank of England’s 2% target for the first time in over three years.
- Forecasts indicate consumer price inflation (CPI) will drop from 2.2% in August to as low as 1.7% in September.
- Factors contributing to the decline include falling global energy prices and the resolution of supply chain issues post-pandemic.
- Economists suggest the inflation drop will pressure the Bank of England to consider interest rate cuts.
- Potential future inflation rises due to increased energy prices and budget measures could reverse this trend.
UK inflation is expected to decline below the Bank of England’s 2% target for the first time in over three years. Forecasts suggest the consumer price index (CPI) will decrease from 2.2% in August to between 1.8% and 1.9% in September. Some analysts, including Barclays, anticipate an even lower rate of 1.7%. This decline is notable given that annual inflation peaked at 11.1% in October 2022.
The anticipated decrease in inflation is primarily attributed to falling global energy prices, resolution of supply chain issues following the pandemic, and the impact of previous aggressive interest rate hikes. Deutsche Bank’s chief UK economist, Sanjay Raja, emphasized this expected reduction, stating inflation could reach a new cyclical low.
This significant drop in inflation intensifies pressure on the Bank of England’s Monetary Policy Committee (MPC) to consider further interest rate reductions. Andrew Bailey, the Bank’s governor, suggested that a more aggressive approach to cutting rates might be necessary if inflation persists in its downward trend and economic growth remains sluggish.
The UK economy has recently experienced a slowdown, with GDP stagnating in June and July and only showing marginal growth of 0.2% in August. This slowdown underscores the challenges the economy faces in maintaining momentum. Konstantinos Venetis from TS Lombard pointed out the necessity for looser monetary policy to address the emerging soft patch in the economy.
Future inflation rates may be subjected to upward pressure as household energy prices are set to increase by 10% in October, and oil prices rise due to Middle Eastern tensions. Furthermore, the forthcoming budget from Rachel Reeves on October 30 could impose additional upward pressure, particularly if VAT is introduced on private school fees and new duties are applied to alcohol and tobacco.
The projected dip in UK inflation below 2% presents both opportunities and challenges amid fluctuating economic conditions.
