The Office for National Statistics (ONS) said consumer price inflation eased to 2.2% in September, the lowest since November 2009. That compares with a rate of 2.5% in August and is in line with economist forecasts. Retail price inflation (RPI), which includes some housing and tax costs, dropped from 2.9% to 2.6%.
Policymakers have been hoping that a fall in inflation will ease the pressure on consumers and encourage people to start spending again to help prop up the economy. However, the figures were skewed by sharp rises in gas and electricity in September last year and inflation is expected to pick up again when this year's round of price increases start to take effect. This month, four of the big six energy suppliers announced bills will rise by 6-9%.
Vicky Redwood at Capital Economics said higher utility bills, rising food prices and university tuition fees will boost inflation in the coming months. But she expected the yearly rate to stay close to the Bank of England's 2% target, and even fall below it as a result of the weakness of the economy. That should pave the way for the bank to announce an extension of the quantitative easing programme later this year.
She said: "While next month's MPC [monetary policy committee] decision is shaping up to be a relatively close call, we still expect more asset purchases to be announced in the coming months."
Tuesday's data will provide George Osborne with a rare piece of good news, as next year's benefits bill could come in lower than forecast as a result. The Office for Budget Responsibility, whose forecasts are used by the Treasury, expected September's CPI [consumer prices index] to be 2.6%. Under that estimate, the benefit bill for next year stood at £183bn.
The lower rate of inflation will also offer relief to retailers and other companies, as the annual increase in business rates, due in the spring, is determined by September's RPI. However, some of Britain's leading retailers are campaigning for rates to be frozen, as the escalation of costs was preventing them from opening new stores and driving the economy.
In a letter to the Financial Times, Ian Cheshire, chief executive of Kingfisher, Charlie Mayfield, chairman of the John Lewis Partnership, and Andy Clarke, chief executive of Asda, called for the moratorium.
Separately, the ONS said factory gate inflation rose to 2.5% – higher than analyst forecasts of 2.2%; while input prices dropped 1.2%, as the price of oil and imported metals came down. The ONS said house prices rose 1.8% on the year in August, down from a 2% increase in July.
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