Falling energy prices sees slowdown in UK inflation
UK inflation increased at its slowest rate in almost three years in October after the energy regulator lowered price caps, according to the Office for National Statistics.
Energy regulator Ofgem lowered price caps in October, while official statistics showed that consumer prices went up 1.5 per cent over the month, compared to 1.7 per cent in September.
Ofgem said that the cap should mean households are saving around £75 per year on utility bills, with around 15 million homes on default deals or pre-payment meters impacted.
Gas prices fell by 8.7 per cent in October compared to the previous month, while electricity prices reduced by 2.2 per cent.
ONS figures show a 1.8 per cent rate of inflation for the third quarter, while average earnings without bonuses increased by 3.6 per cent over the period, suggesting that consumers may have more spending power given wages are rising quicker than the rate of inflation.
The inflation rate was lower than that forecast by economists, with the Bank of England saying that it could fall to 1.25 per cent in early 2020, below its two per cent target.
An ONS spokesperson said: "A fall in utility prices due to a lowering of the energy price cap helped ease inflation in October. However, this was partially offset by rising clothing prices.”
Prices of clothes and footwear rose by one per cent on the previous month after falling a year ago.
Economist Jing Teow of PwC said that rising wages and falling inflation has supported economic growth by boosting household spending over the last two years, but pressure will be easing on firms to raise prices due to pay growth starting to slow since peaking in June 2019.
Ruth Gregory, senior economist at Capital Economics, said that she expects utility prices to fall again in April next year and that the low rate of inflation will likely see an impact on interest rates.
Gregory said: “Overall, the figures do little to change our view that inflation will spend more time below two per cent than above it in 2020 and that if Brexit delayed further, interest rates will be cut in May 2020.”
However, leading UK economist at Pantheon Macroeconomics, Samuel Tombs, believes that inflation should reach two per cent in the second half of next year which should reduce the incentive to slash interest rates.