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Inflation falls to three-year low as energy prices fall

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UK inflation rose at its lowest pace in almost three years last month as the energy cap kept a lid on the price of electricity, gas and other fuels, according to official statistics.

The Office for National Statistics (ONS) said consumer prices rose 1.5% in October, against 1.7% in September.

Energy regulator Ofgem lowered price caps last month.

The slower pace of price rises could boost household spending power as wages are rising faster than inflation.

ONS data released on Tuesday showed that average earnings, excluding bonuses, increased by 3.6% in the three months to September.

The October inflation number was lower than the 1.6% forecast by economists, although the Bank of England has said inflation could slip to 1.25% early next year - well below its 2% target.

A spokesperson for the ONS 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 1% on the previous month, the ONS said, with the most significant price moves being in ladies' formal trousers and branded trainers.

Analysis:

Andrew Walker, BBC World Service economics correspondent

The Bank's policy makers expect the decline in inflation to continue in the first half of next year, due partly to the impact of the energy price cap and a likely reduction in water bills.

But they think those factors will fade and inflation will move back towards the target in the latter part of 2020. So the October data doesn't very much change the argument about the next move in interest rates.

Two big uncertainties are perhaps more likely to move the dial: Brexit and the slowdown in the global economy.

Indeed the Bank has already signalled as much. Persistent Brexit-related uncertainty and further weakness in global growth could mean it "might need to reinforce the expected recovery in UK GDP growth and inflation" - in other words cut interest rates.

If those risks don't materialise a rise would be more likely. But no move is imminent.

Gas and electricity prices fell by 8.7% and 2.2% respectively in October from September.

Ofgem said that around 15 million households on default deals or pre-payment meters will see lower bills this winter as a result of its latest cap on prices which took effect from October.

The cap means that households should typically pay £75 less a year.

Howard Archer, chief economic advisor to the EY Item Club, said the inflation figures were "decent news for consumer purchasing power".

The 3.6% rise in wages in the three months to September compares with an inflation rate of 1.8% over the period.

Jing Teow, economist at PwC, said: "The continued trend of falling inflation since late 2017, coupled with the steady rise in wages since 2018, has boosted household spending power, which has supported UK economic growth over the past two years."

But she said there were signs that pay growth was "cooling off" since peaking in June this year, which might also put less pressure on firms to raise prices.

The inflation rate has implications for interest rates. Ruth Gregory, senior UK economist at Capital Economics, said the falls in energy prices meant that the drop in inflation was not "a reflection of a weakening in underlying inflationary pressures".

She expects a further fall in utility prices in April next year.

"Overall, the figures do little to change our view that inflation will spend more time below 2% than above it in 2020 and that if Brexit is delayed further, interest rates will be cut in May 2020," she said.

Emma-Lou Montgomery, associate director for personal investing at Fidelity International, also said there could be pressure to cut in rates - currently at 0.75% - early in 2020.

But Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the inflation measure should rise back to 2% in the second half of 2020 so he doubted that rates would be cut soon.

Related Topics

  • Office for National Statistics
  • UK economy
  • Ofgem
  • Inflation
  • Energy industry

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