UK inflation expected to dip below 2% for first time in over three years

The annual inflation rate in the United Kingdom 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 expected to show a decline in consumer price inflation from 2.2% in August to between 1.8% and 1.9% in September, the first time inflation has fallen below the Bank of England’s 2% target in more than three years. years. .

The expected decline in inflation comes as a result of lower global energy prices, the resolution of supply chain issues in the wake of the pandemic, and the impact of significant hikes in interest rates. Annual inflation has been declining steadily since peaking at 11.1% in October 2022.

Economists note that September’s inflation figure may be lower than the Bank of England’s forecast of 2.1%, driven by the sharp decline in energy and oil prices last month. Analysts at Barclays Bank suggest inflation could fall to 1.7%, while Deutsche Bank points to a broader deflation in energy prices and lower food, tobacco and services costs pushing inflation down to 1.8%.

“After the headline CPI moved sideways in August, we expect inflation to fall to a new cyclical low in September,” said Sanjay Raja, chief UK economist at Deutsche Bank.

This expected decline in inflation will increase pressure on the Bank of England’s Monetary Policy Committee to consider further interest rate cuts. Andrew Bailey, the bank’s governor, recently warned that interest rate setters may need to be “a little more aggressive” about cutting interest rates if inflation continues to weaken and the economy shows signs of slowing.

The UK economy has seen a marked slowdown in growth in recent months, with stagnant GDP in June and July, and growth of just 0.2% in August, compared to quarterly growth of 0.7% at the start of the year.

“Inflation is stabilizing lower, leaving the economy struggling to maintain momentum,” said Konstantinos Venitis of TS Lombard. “Signs that a soft correction is taking shape are becoming clearer, indicating the need for more flexible monetary policy.”

Traders are now anticipating that the bank will cut interest rates twice before the end of the year, which could bring the key interest rate down to 4.5%.

However, inflation is likely to rise again in the coming months, with household energy prices increasing 10% in October and oil prices rising due to tensions in the Middle East. In addition, measures from Rachel Reeves’ upcoming Budget on 30 October, such as the introduction of VAT on private school fees and potential duties on alcohol and tobacco, could also see inflation rise again.