The Consumer Price Index (CPI) measure of inflation dropped from 1.5% in August to 1.2% in September, official figures showed today.
They revealed the continuing effect of the supermarket price war, with food prices subdued for their longest sustained period for a decade and lower petrol prices also dragging inflation down.
The pound tumbled a cent to below 1.60 US dollars as the steeper than expected fall in CPI led to speculation that the Bank of England would delay a rise in interest rates which had been widely expected in February next year.
Rates have been held at 0.5% for more than five years to nurse the economy back to health from the recession but Bank of England governor Mark Carney has said the recovery means the time for a rise is nearing.
However economists said that with the inflation figure so low there was no pressure on the Bank to hike especially at a time when there are fears that weakness in the eurozone, Britain’s biggest trading partner, will have a knock-on effect in the UK.
Markit chief economist Chris Williamson said falling oil prices and import costs, plus the supermarket price war and subdued wage growth meant inflation looked likely to continue to fall in coming months.
He added: “While a few months ago, the likelihood was growing that the Bank might need to hike interest rates in late 2014 or early next year, the data are now stacking up to suggest a hike could be delayed at least until next summer, after the general election.”
The September figures also meant that the state pension would rise by twice the rate of inflation, or £2.85 a week, next spring.
That is because of the Coalition’s “triple lock” which means pensions will rise by at least 2.5% or by September’s CPI figure or average earnings, whichever is higher.
Prime Minister David Cameron welcomed the fall in inflation.
He said: “Our long-term economic plan is delivering more financial security and stability for families. Today’s inflation figures mean a big real-terms increase in the state pension next year - helping people who’ve worked hard all their lives.”
Labour pointed out that pay was continuing to fall in real terms, with wage rises lagging behind inflation at 0.6%. Latest employment data published tomorrow is expected to show little improvement.
Shadow Treasury minister Catherine McKinnell said: “The squeeze on working people continues despite this fall in the rate of inflation.
“Labour’s economic plan will tackle the cost-of-living crisis and earn our way to higher living standards for all, not just a few at the top.”
Today’s figures from the Office for National Statistics (ONS) showed food and non-alcoholic beverage prices fell 1.4% year-on-year, the steepest drop since June 2002 and the fifth month in a row that they have not risen on an annual basis.
It is the longest sustained period of flat or falling food prices since the end of 2004.
Petrol fell by 0.8p per litre in September compared with the previous month while diesel dropped 0.7p, amid falling oil prices.
The ONS said that without the impact of food prices and fuel, CPI would have been about a third higher at 1.6%.
Prices of sea and air fares, computers and games consoles, books and e-books, together with those charged by restaurants and cafes also contributed to the low inflation figure.
CPI has now been below the Bank of England’s 2% target for nine months in a row and was last lower, at 1.1%, at the height of the recession in September 2009. Apart from that month it has not been lower in a decade. It was 1.2% in October 2004.
Bank governor Mr Carney must write to the Chancellor with an explanation if CPI is more than 1% above or below the 2% target, with growing speculation that he will be obliged to do so as it falls further in coming months.
While low inflation eases some of the strain on household budgets, policy makers will be concerned if there is a danger of it sliding too much.
Ultra-low inflation in the eurozone has prompted emergency rate cuts and stimulus by the European Central Bank as it battles to stave off the threat of a damaging deflationary spiral.
Samuel Tombs, of Capital Economics, said there was plenty of scope for UK inflation to decline further, amid further effects from falling oil prices and pledges by energy suppliers to freeze household gas and electricity tariffs.
He added that recent falls in import prices or UK producer prices had yet to feed through to the high street.
“Accordingly, CPI inflation looks set to dip below 1% later this year, forcing Mark Carney to write his first letter to the Chancellor explaining why inflation is more than 1% adrift from its target.”
Howard Archer, of IHS Global Insight, said: “We have long been expecting the Bank of England to first raise interest rates from 0.50% to 0.75% in February - but it is looking ever more likely that the Bank will delay acting until nearer mid-year.”
David Kern, chief economist at the British Chambers of Commerce, said: “This fall in inflation, coupled with weak wage growth, reinforces our call for the MPC to keep interest rates at their current level for the foreseeable future.”
Asked whether Mr Cameron was happy with a situation which is likely to see state pensions rise faster than earnings, the Prime Minister’s official spokesman told a regular Westminster media briefing that the PM regarded the triple lock as “very important as part of ensuring that people are going to have the support they deserve once they reach retirement”.
The spokesman added: “That is a real commitment to that section of society.
“In terms of average earnings, the way to ensure that we have sustainable increases in families’ living standards is by having stable growth. So, he wouldn’t put it in an either/or kind of way - we want to see both.
“You want policies that support people in retirement and you want policies that support growth, because that is what feeds through to higher living standards.”