Inflation falls again: Consumer Price Index falls to a five-year low of 1.2pc in September

Lynsey Barber
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Inflation slowed even more than expected in September (Source: Getty)

The consumer price index (CPI) of UK inflation fell even further than expected, down to 1.2 per cent in September from 1.5 per cent the previous month, hitting a five-year low.

CPI was expected to slow slightly to 1.4 per cent according to analyst forecasts. But the slump is even further below the Bank of England’s two per cent target and comes in under that target for the ninth consecutive month.

The measure was pushed down further by falling transport costs and the price of recreational goods, according to the Office for National Statistics, particularly air fares and the cost of tablet computers which became cheaper.

It said inflation would be a third higher if falling food and motor prices were excluded- good news for consumers and the figure again eases pressure on the Bank of England to increase interest rates.

Some analysts now say an interest rate rise could be held off beyond the first quarter of 2015 when it was expected - "well into 2015" according to IHS's Howard Archer.

The Centre for Economics and Business Research said it's "increasingly looking like a November 2015 rate rise".

Others point out core inflation- stripping out the volatility of food and energy prices which are outside UK control- puts inflation closer to the BoE's target at 1.5 per cent.

Berenberg's Rob Wood said: "Low inflation gives the BoE room to wait before hiking rates but we expect Eurozone sentiment to turn up by the end of the year, UK unemployment to keep falling rapidly and the tightening labour market to show up in gradually improving wage growth over the next twelve months, making the case for a rate hike early next year. For now though, the BoE will stand pat. We expect the first 25bp hike from the BoE in February."

Meanwhile the Insititute of Directors' head economist James Sproule was far more bullish, calling for an immediate return to "normal levels"

Inflation is not the problem, and nor has it been for some time. Furthermore, inflationary concerns have not been the basis on which the IoD has called for an interest rate rise.

The UK economy has seen a number of highly positive developments in the past few years. Wage flexibility has contributed to high degrees of employment, price flexibility has lowered the long term stable rate of interest rates, there are signs of rising productivity as wages are tied more closely to company performance, and now energy prices are reflecting broader movements in the underlying prices of petrochemicals.

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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