UK inflation is on track to drop below 2% for the first time in over three years, influenced by global energy price decreases and resolved supply chain issues.
Analysts forecast consumer price inflation (CPI) will decrease to between 1.8% and 1.9% in September, a significant marker since October 2022. This trend urges the Bank of England to reconsider monetary policies.
Official projections indicate a drop in CPI from 2.2% in August to as low as 1.7%, propelled by falling global energy prices and resolved pandemic-induced supply chain issues.
The consistent decline in inflation since its peak at 11.1% in October 2022 highlights the impact of aggressive interest rate hikes and a reduction in oil prices.
Analysts at Barclays and Deutsche Bank suggest the dip is supported by broader energy price deflation and a decrease in food, tobacco, and services costs.
Sanjay Raja from Deutsche Bank emphasises, “After headline CPI moved sideways in August, we expect inflation to drop to a new cyclical low in September.”
The anticipated decline in inflation applies pressure on the Bank of England’s monetary policy committee (MPC) to consider interest rate cuts.
Andrew Bailey, Governor of the Bank of England, indicated potential for more aggressive interest rate reductions if inflation continues to weaken.
Traders predict the Bank may cut interest rates twice before year-end, possibly reducing the base rate to 4.5%.
The UK economy has experienced a significant slowdown, with GDP stagnant in June and July and minimal growth of 0.2% in August.
Compared to a 0.7% quarterly growth rate earlier in the year, the economy shows signs of a soft patch.
Despite the current dip, inflation is expected to rise again due to a 10% increase in household energy prices in October.
Global tensions, particularly in the Middle East, are driving oil prices up, impacting future inflation trends.
Rachel Reeves’ upcoming budget may introduce VAT on private school fees and new duties on alcohol and tobacco, potentially elevating inflation.
Konstantinos Venetis, of TS Lombard, notes that the economy is struggling to maintain momentum, suggesting a need for looser monetary policy.
Evidence of a soft economic patch becoming more apparent further supports expectations of a monetary policy shift.
The expected dip in inflation below 2% represents a pivotal moment for the UK economy, offering potential relief to consumers and businesses alike.
The decrease in inflation opens discussions for the Bank of England to adjust interest rates, balancing between economic growth and inflation control.
While the dip presents immediate benefits, longer-term pressures suggest vigilance as energy prices and fiscal policies continue to influence inflation. Future economic strategies must adapt to these evolving circumstances.
