Inflation plunges to 1.2%

Inflation dropped in September to 1.2 per cent, the lowest figure for five years, according to the latest figures from the Office for National Statistics.

Measured by the Consumer Price Index (CPI), the rate fell from 1.5 per cent in August to close in on the 1.1 per cent low recorded back in September 2009.

The reduction was driven by a decrease in energy and food prices, as well as a drop in the cost of transportation – particularly sea and air fares. 

A third of the rate of inflation in the 12 months to September was made up of housing and household services. Were food and motor fuel prices to be excluded from the reckoning, the rate would rise by a third.

The CPI is used as a target by the Bank of England, which aims to keep inflation at around the two per cent mark. 

Currently, the UK economy is growing faster than any other country in the developed world – a trend that would typically result in the rate of inflation being increased. 

Some economists have been predicting the Bank of England will boost inflation above the current level of 0.5 per cent – a record low – before the end of the year, although most have been expecting an increase to take place in early 2015.

However, these latest figures suggest a rise in rates could be delayed further still, with EY Item Club senior economic adviser Martin Beck insisting there is “little sign” of any inflationary pressures on the horizon.

“The chances of the MPC voting for an increase in interest rates this year have fallen to practically zero,” he claimed. 

“Unless inflation begins to pick up soon, it is likely that the first hike will be pushed out towards the middle of next year, if not later.”

Mr Beck’s comments are backed up by the minutes of September’s Monetary Policy Committee (MPC) meeting, which showed most members felt there was insufficient evidence of potential inflationary pressures to necessitate a rise in the bank rate in the near future.

However, two MPC members argued that current economic conditions are sufficient to justify an immediate rate increase.

This view was echoed by the Institute of Directors (IoD), which insisted that the drop in inflation must not dissuade the Bank of England to push back an upturn to the rate of interest.

James Sproule, the institute’s chief economist, stressed that inflation is not the problem and that past inflationary concerns have never been a motivation for the IoD to suggest a rate rise.

“The UK economy has seen a number of highly positive developments in the past few years,” he declared.
 
“With such a range of indicators showing the UK economic recovery is on track, we need to start bringing interest rates back to a normal level now.”

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