Inflation reached its slowest rate since 2016 in August, falling to 1.7 per cent and suggesting interest rates are unlikely to rise in the near future.
The rate is down from 2.1 per cent the month before, 20 basis points lower than the expected 1.9 per cent and 30 less than the Bank of England’s 2 per cent target.
KPMG’s chief economist, Yael Selfin, said this gave the BoE “margin to pause” meaning there was “no impetus” for the central bank to raise interest rates this year.
The BoE is unlikely to raise interest rates at times of low inflation as it aims to grow the economy.
Lower rates mean consumers pay less interest on their debts and get lower returns on any cash savings, meaning they are encouraged to spend.
David Scammell, fixed income and macro strategist at Brown Shipley, said sterling weakness, higher oil prices and the “traditional stickiness of UK inflation expectations” meant it was hard to envisage a significant move away from present inflation levels.
He also thought the BoE would be “unmoved” by todays’ data release. He said: “While governor Carney has stated that rates could move in either direction, today’s numbers support the view that rates are more likely to peregrinate lower.”
According to the Office for National Statistics, consumer prices were pushed down in August by a range of recreational and cultural goods and services — such as toys and hobbies — alongside clothing and sea fares.
The ONS also said a rise in the price of flights was the largest counter to this downward trajectory, while food costs also went up.
The rate of inflation fell to 1.8 per cent in January — the lowest in the past year — but had been on upward trajectory until today’s announcement.
ONS head of inflation, Mike Hardie, said: “The inflation rate has fallen noticeably into August, to its lowest since late 2016.
“This was mainly driven by a decrease in computer game prices, plus clothing prices rising by less than last year after the end of the summer sales.”
The low rate means inflation was still a way below earnings growth, with the latest data from the ONS showing average weekly earnings were rising about 4 per cent year-on-year.
But the pound fell 0.4 per cent against the dollar following the announcement after recovering to an eight-week high yesterday (September 17).
Adrian Lowcock, head of personal investing at investment platform Willis Owen, said: “This is a sharp drop in inflation which has taken markets by surprise, coming in significantly lower than expected.
“It’s good news for those investors holding cash, as it means the value of their money is holding up better than it was, but ultimately inflation remains well above the rates most of us can get on the high street via cash Isas.
“Savers should therefore take advantage of low inflation to invest in other asset classes where they can generate more money, especially as these readings can be very volatile.”
imogen.tew@ft.com
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