Inflation expected to fall below target for first time in three years

UK inflation is expected to drop below the 2% target rate for the first time since April 2021.

The Office for National Statistics (ONS) will unveil the latest monthly Consumer Price Index (CPI) inflation reading on Wednesday morning.

The economic data – which shows how much the price of goods and services have increased or decreased – is predicted to reveal inflation of 1.9% for September, according to a consensus of economists.

It would represent a slowdown in price increases after a 2.2% reading in August.

A reading of 1.9% or lower would be expected to add pressure onto Bank of England rate-setters to cut interest rates further.

Peaked

UK inflation peaked at 11.1% in October 2022 after energy prices soared due to the Russian invasion of Ukraine, with the central bank hiking interest rates in order to bring inflation under control.

Inflation eased significantly after interest rates – which steer borrowing costs and mortgage rates – were raised to 5.25%. They were decreased to their current rate of 5% in August.

Inflation dropped to the target rate set by the Bank of England and the Government, of 2%, in May and July, but since then have ticked slightly higher.

April 2021

The rate is now expected to fall below target for the first time since April 2021, when it was 1.5%.

Economists at Pantheon Macroeconomics have predicted a 1.9% reading for the month, which they say is likely to be driven by falling motor fuel prices.

It added that falling air travel fares are also likely to contribute to a dip in inflation, although these could be partially offset by higher domestic hotel prices.

Elsewhere, Investec analysts have suggested CPI could drop as low as 1.7%, largely driven by a “hefty” fall in fuel prices.

They have also predicted that core inflation, which excludes food, energy, alcohol and tobacco and is watched closely by policymakers, will slow from 3.6% to 3.2%.

The inflation data comes after the ONS revealed on Tuesday that wage growth slowed to its lowest level for two years.

Average regular earnings growth eased back to 4.9% in the three months to July, down from 5.1% in the previous three months.

As a result, most economists are pricing in a rate cut by the Bank of England’s Monetary Policy Committee (MPC) at next month’s vote on rates.

It comes after Andrew Bailey, the Governor of the Bank, warned earlier this month that interest rate cuts could become “more aggressive” and that policymakers might be able to be “more activist” over reducing borrowing costs if inflation stays in check.