Cheer as inflation dips to lowest level in over year

POSITIVE signs of economic recovery were hailed yesterday as official figures revealed inflation had fallen to its lowest level in more than a year, while data showed more loans were given to home buyers between July and September than in any other quarter since 2007.

As the Bank of England prepared to publish its latest quarterly outlook for the economy today, the sharper-than-expected drop in the Consumer Prices Index (CPI) rate from 2.7 per cent in September to 2.2 per cent in October was seen as easing pressure to lift historically-low interest rates. Sterling fell on currency markets as a result.

Hide Ad
Hide Ad

The figure equals the level of inflation in September last year and takes it closer to reaching the Bank’s target level of 2 per cent for the first time in four years. It was last lower, at 1.9 per cent, in November 2009.

Prime Minister David Cameron hailed the fall as “encouraging news for hard-working people” in a Twitter message, although Labour pointed out that wages – rising at an annual rate of just 0.7 per cent, according to latest figures – were still lagging behind.

And savers are also still struggling to find accounts that beat the rise in the cost of living, according to price comparison website Moneyfacts.

Hide Ad
Hide Ad

Policymakers at the Bank of England’s monetary policy committee (MPC) were shown the figures last week before making their latest decision to hold interest rates.

Today, the MPC’s quarterly Inflation Report will take the temperature of the economy amid speculation it will upgrade forecasts for growth and jobs.

Lower inflation expectations will reduce the pressure on the Bank to cut interest rates although better prospects for the UK’s gross domestic product (GDP) and unemployment will have the opposite effect.

Hide Ad
Hide Ad

The Bank has pledged not to raise interest rates before the jobless rate falls to 7 per cent and indicated this target is unlikely to be met until the third quarter of 2016 at the earliest.

So the likelihood of this target being met sooner would add to anxiety that interest rates will be raised from their historic low of 0.5 per cent before that time.

A safeguard built into the “forward guidance” policy means rates can be subject to a “knockout” if inflation looks likely to spiral out of control but this is looking less likely now that it is close to the Bank’s two per cent target.

Hide Ad
Hide Ad

Key factors in the latest fall in CPI were a petrol pump price war that saw 4.9p cut from a litre of fuel during October, and a smaller impact from university tuition fees, a year after they were introduced.

Recently-announced energy price hikes of around nine per cent have yet to take effect and are likely to have an upward impact on inflation later this year.

Martin Beck of Capital Economics said: “October’s inflation data suggests that the UK economy is hitting a sweet spot of accelerating growth and falling inflation.”

Hide Ad
Hide Ad

Chris Williamson, chief economist at Markit, said: “The easing in the rate of inflation and underlying price pressures will provide greater scope for monetary policy to be kept looser for longer and thereby helping ensure a sustainable upturn in the economy.

Figures from the Council of Mortgage Lenders revealed that 170,700 mortgage deals worth £27.1bn were advanced for house purchase in the third quarter of this year, marking the busiest three-month period seen since winter 2007

It said that despite a seasonal drop-off in activity in September, which is the latest month for which its figures are available, the fact that lending is much stronger year-on-year points to a gathering momentum and puts the market in a “good position” for 2014.