UK inflation is projected to fall below the 2% target for the first time in over three years, driven by various economic factors.
- Official figures suggest a decline in consumer price inflation (CPI) from August’s 2.2% to between 1.8% and 1.9% in September.
- The anticipated drop in inflation is attributed to global energy price reductions and the resolution of pandemic-induced supply chain issues.
- Barclays and Deutsche Bank analysts predict inflation could dip as low as 1.7% due to decreased energy and oil prices.
- This decline in inflation is expected to increase pressure on the Bank of England’s monetary policy committee to consider interest rate cuts.
The United Kingdom is witnessing a notable shift in its economic landscape as inflation is poised to fall below the Bank of England’s 2% target for the first time in more than three years. Official predictions indicate a decline in consumer price inflation from 2.2% in August to a range between 1.8% and 1.9% in September. This anticipated reduction marks a significant milestone, highlighting a break from the persistent inflationary pressures that have characterized the economy in recent years.
A combination of falling global energy prices, resolution of supply chain disruptions following the pandemic, and the effects of previous aggressive interest rate hikes are being cited as the primary catalysts for this decrease in inflation. Economists suggest that the September inflation figures might even fall below the initial forecast of the Bank of England, potentially reaching as low as 1.7%. Banks such as Barclays and Deutsche Bank point to broader deflation in energy prices and declines in costs of food, tobacco, and services as contributing factors.
Sanjay Raja, the chief UK economist at Deutsche Bank, noted, “, ‘After headline CPI moved sideways in August, we expect inflation to drop to a new cyclical low in September.'” This expected drop in inflation creates significant pressure on the Bank of England’s monetary policy committee to consider loosening its monetary stance. Andrew Bailey, the governor of the Bank of England, has recently acknowledged the possibility of more aggressive interest rate reductions if inflation continues its downward trajectory and the economy shows further signs of deceleration.
The UK economy has exhibited a notable deceleration in growth over the past months. The GDP remained stagnant in June and July, with a modest growth of 0.2% recorded in August, a stark contrast to the 0.7% growth witnessed at the beginning of the year. Economists suggest that the economy is losing momentum, necessitating a more flexible monetary policy approach. The potential for interest rate cuts before year’s end is widely anticipated, with traders foreseeing at least two rate reductions.
However, there are concerns that inflation may rise again in the coming months. Key factors include a projected 10% increase in household energy prices in October and escalating oil prices due to geopolitical tensions in the Middle East. Upcoming budgetary measures from Rachel Reeves, such as the introduction of VAT on private school fees and potential duties on alcohol and tobacco, are also seen as possible contributors to a future increase in inflation.
The downward trend in UK inflation signals significant economic transitions but raises concerns about potential future fluctuations.
