Inflation dips in September but remains well above BoE target

UK consumer price inflation unexpectedly dipped in September despite the rising cost of fuel and transport, according to figures released on Wednesday by the Office for National Statistics.
CPI fell to 3.1% from 3.2% in August, versus expectations for it to remain unchanged. Still, it remains well above the Bank of England’s target of 2%, meaning it’s unlikely to do anything to reduce expectations the Bank will raise interest rates before the end of the year.

The decline was due mainly to the impact of last summer’s ‘Eat Out to Help Out’ scheme. The biggest downward contribution came from restaurants/cafes inflation, which fell to 3.9% in September from 7.9% the month before.

Core inflation, which strips out volatile elements such as food and fuel, fell to 2.9% from 3.1%.

ONS Head of Prices Mike Hardie said: “Annual inflation fell back a little in September due to the unwinding effect of last year’s ‘Eat Out to Help Out,’ which was a factor in pushing up the rate in August.

“However, this was partially offset by most other categories, including price rises for furniture and household goods and food prices falling more slowly than this time last year.

“The costs of goods produced by factories rose again, with metals and machinery showing a notable price rise.

“Road freight costs for UK businesses also continued to rise across the summer.”

Paul Dales, chief UK economist at Capital Economics said: “This feels a bit like the lull before the storm as the 12% rise in utility prices on 1st October will probably lift CPI inflation to around 3.8% in October.

“And we think inflation could then climb to around 5.0% in April next year due to a further rise in utility prices and the upward influence from global/domestic product shortages. With underlying wage growth and inflation expectations rising, the BoE is concerned that higher inflation will become embedded in the system. That’s why it become much keener to raise interest rates.”

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said inflation is expected to reach 4%, double the BoE’s target by the end of the year, and potentially 5% by next April.

“With prices staying stubbornly high and another surge expected, a gentle rise in interest rates before the end of the year still looks likely if there is any chance of keeping a Goldilocks economy within reach.

“Too much inflation in the mix risks the economy getting too hot, leading prices to spiral upwards. If rates are pushed up rapidly, there’s a risk it gets too cold, freezing off economic growth. A 2% inflation target is considered just right, as long as the economy also keeps growing.”

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