The annual pace of price rises is expected to have slowed sharply when the latest official figure for October is released on Wednesday, easing fears that the Bank of England could increase interest rates next month.
City economists polled by Reuters have signalled that inflation as measured by the consumer prices index (CPI) will fall almost two percentage points to 4.8% from September’s 6.7% reading.
The decline does not mean prices are falling, just that they are rising less rapidly, and would remain well above the central bank’s 2% target, but would be a significant signal to Bank rate-setters that prices are on course to come down over the next year without the need for further increases in the cost of borrowing.
At the heart of the decline is a 23% cut in the UK energy price cap on the typical annual gas and electricity bill from £2,500 last October to £1,923 the same month this year.
Food price inflation has dropped to single digits for the first time in a year and a half, according to industry figures, and is also expected to help reduce the headline rate. Grocery price inflation slowed to 9.7% in the four weeks to 29 October, according to the data company Kantar, after almost reaching 20% earlier this year.
The forecast drop will be welcomed by Rishi Sunak, helping the prime minister fulfil one of five pledges he set at the start of the year – that of halving inflation by the end of 2023, to 5.3% or lower, from the 10.7% average in the last quarter of 2022.
The expected tumble in the UK CPI comes after France, Germany and the US reported steep falls in inflation in October, easing fears that high levels of inflation across the industrialised world that followed the pandemic and Russian invasion of Ukraine will persist into 2024.
US inflation fell on Tuesday to 3.2% from 3.7% in September, beating expectations of a 3.3% increase. Global stock and bond markets continued a recent recovery as analysts indicated that the improved situation would persuade the Federal Reserve to hold interest rates at its next meeting.
Most of the UK’s competitors have lower inflation. Inflation across the eurozone was 2.9% in October with France at 4% and Germany at 3.8%.
US core inflation, which strips out food and energy, and is a much-watched measure of pressure from rising prices, fell to 4%, the lowest since September 2021. In the UK, core inflation is only expected to fall to 5.8% from 6.1% in September, following strong prices rises by large sections of the services sector.
Last month the Bank of England held interest rates at 5.25% and warned that 14 consecutive increases since 2021 had pushed the economy to the edge of recession.
Oxford Economics, a consultancy, said in a global overview of inflation trends that the UK was already close to recession and inflation would continue to fall over the next few months, a trend that would usually prompt the central bank to cut interest rates.
However, shortages of skilled labour would push up wages, limiting the ability of many firms to cut prices without hitting their profits.
Rob Morgan, chief investment Analyst at the stockbroker Charles Stanley, said: “Wage growth is one of the key considerations for the Bank of England when it comes to setting interest rates … The persistence of pay growth will cause the Bank some concern that the fires of inflation won’t be easily quelled and that interest rates will have to remain higher for longer.”
