Inflation falls more than expected

City A.M. Reporter
Inflation in Britain eased more than forecast to five per cent in October, official data showed on Tuesday, lending support to Bank of England expectations that inflation has probably peaked and will fall sharply next year.

Consumer prices rose 0.1 per cent last month, taking the annual inflation rate down to five per cent from a three-year high of 5.2 per cent in September, the Office for National Statistics said.

Analysts had expected an annual rate of 5.1 per cent.

However, inflation remains more than double the bank of England's two per cent target and therefore Governor Mervyn King will have to write an explanatory letter to Chancellor George Osborne.

The slowdown in inflation was driven by lower food, air transport and petrol inflation. On the month, food prices fell 0.9 per cent - their sharpest decline for a month of October since 1996.

Upward pressures on inflation came from utility prices, which rose at their fastest annual rate since February 2009. Clothing prices also rose.

The retail price inflation gauge, which includes more housing costs and is the benchmark for many wage deals, slowed to 5.4 per cent on the year from 5.6 per cent in September, versus a forecast reading of 5.5 per cent.

The figures are welcome news for the Bank, which is expected to give a gloomy outlook for the economy in its quarterly growth and inflation forecasts.

Several Bank policymakers have warned of the possibility of another recession in Britain, brought ever closer by the debt crisis engulfing Britain's main trading partner, the euro zone.

The economic weakness, the Bank expects, will also bring inflation down and help it fall sharply next year, when one- offs such as the VAT tax hike also drop out of the equation.

In a sign that pipeline drivers of CPI inflation are easing, factory gate inflation slowed to its lowest annual rate since May last month as input costs rose less than forecast, data showed last week.

On the month, the input costs of both imported and home-produced food fell, raising chances of lower consumer food prices in the coming months.

Meanwhile inflation will fall sharply over the next six months to hit its two per cent target by the end of 2012, as a deteriorating global economic outlook weighs on the economy, Bank of England governor Mervyn King said.

In a letter to Chancellor George Osborne that he was obliged to write after official data showed inflation came in at five per cent in October, King said the economic outlook had deteriorated since August and therefore warranted the Bank's decision to inject £75bn of stimulus in October.