UK inflation tipped to fall below 2% target

Annual inflation in the UK is expected to have fallen below 2 per cent for the first time since April 2021, data is expected to reveal.
Official figures released next Wednesday are expected to show a dip in consumer price inflation (CPI) from 2.2 per cent in August to 1.8 to 1.9 per cent in September. It will mark the first time that price growth has fallen below the Bank’s 2 per cent target in more than three years and will pile the pressure on the monetary policy committee (MPC) to cut interest rates next month.
Annual inflation has fallen steadily from a peak of 11.1 per cent in October 2022, on the back of rapidly falling global energy prices, an unwinding in supply chain disruption after the pandemic and the impact of aggressive interest rate rises.
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Economists expect the September inflation figure to come in lower than the 2.1 per cent forecast by the Bank of England after a steep decline in energy and oil costs last month. Analysts at Barclays said inflation could fall to 1.7 per cent and Deutsche Bank said declining pump prices, broader energy price deflation and dips in food, tobacco and services costs will have dragged inflation down to 1.8 per cent in September.
“After headline CPI moved sideways in August, we expect inflation to drop to a new cyclical low in September,” Sanjay Raja, chief UK economist at Deutsche Bank, said.
Andrew Bailey, the Bank’s governor, warned last week that ratesetters may have to be “a bit more aggressive” and “activist” with interest rate cuts if incoming data point to weaker inflation, a slowing economy and a cooling labour market with declining wage rises. The MPC has so far carried out only one monetary loosening, in August, the first time it has lowered borrowing costs in four years.
Economic growth has slowed significantly in recent months: GDP was stagnant in June and July and rose only by 0.2 per cent in August. That compares with quarterly expansion of 0.7 per cent in the first three months of the year, emboldening doveish members of the rate-setting committee to call for more monetary easing.
“Inflation is settling lower, leaving the economy struggling to maintain momentum,” Konstantinos Venetis at TS Lombard, a research consultancy, said. “Evidence of a soft patch taking shape is becoming clearer after a solid start to the year. The chances of the economy being able to sustain the positive momentum always looked slim, pointing to the need for a shot in the arm from looser [monetary] policy.”
Traders now expect the Bank to cut rates twice, rather than once, before the end of the year, taking the base rate down to 4.5 per cent.
Inflation is expected to creep up again from this month as household energy prices will rise by 10 per cent in October and oil prices have climbed over worries about conflict in the Middle East.
There is also uncertainty over the inflationary impact of measures to be taken by Rachel Reeves in her first budget on October 30. Introducing VAT on private school fees is likely to push up inflation in the education sector and any additional duties on alcohol and tobacco would raise prices on those goods.
Inflation in the eurozone fell to an average of 1.8 per cent last month and is down at 2.4 per cent in the US. Both economies have already cut interest rates faster than the Bank and the European Central Bank is expected to carry out its third monetary loosening in four months next week.