ANNUAL UK inflation fell much further than forecast in October, as petrol prices dropped more sharply and student tuition fees rose by less than at the same time last year.
The sharp drop in annual inflation to a 13-month low, revealed in figures published yesterday by the Office for National Statistics, was viewed by economists as giving the Bank of England greater room for manoeuvre in being able to hold UK base rates at the record low of 0.5%.
A sharper fall in UK unemployment than projected by the Bank, coupled with stronger-than-expected growth in output in recent quarters following a dismal period, has fuelled talk that base rates might have to rise sooner than the Old Lady of Threadneedle Street has signalled.
The annual UK consumer prices index (CPI) inflation rate fell from 2.7% in September to 2.2% in October, moving close to the 2% target set for the Bank of England by the Treasury. The City had forecast annual inflation would come in at 2.5% in October.
And core annual CPI inflation, which excludes energy, food, alcohol and tobacco, dropped from 2.2% in September to 1.7% in October. This is the lowest rate since September 2009.
Martin Beck, UK economist at consultancy Capital Economics, noted the overall annual UK CPI inflation rate in October was the joint lowest since November 2009.
He cited the potential impact of recent hikes in household electricity and gas prices on the annual CPI inflation rate in November, but also flagged the possible impact of any Government action to reduce fuel bills.
Mr Beck said: "Mooted action by the Government to reduce energy bills in December's Autumn Statement could push down inflation further. Admittedly, inflation in November could rise slightly as utility price hikes take effect. But this consequence could well be short-lived."
The Bank's Monetary Policy Committee said in August that it did not intend to raise base rates from 0.5% - at which they have stood since March 2009 - at least until the International Labour Organisation measure of unemployment had fallen to a "threshold" of 7%. It projected this would not happen until 2016.
This forward guidance is subject to "knockouts" relating to inflation and financial stability.
Chris Williamson, chief economist at financial information company Markit, said: "The easing in the rate of inflation and underlying price pressures will provide greater scope for monetary policy to be kept looser for longer, thereby helping ensure a sustainable upturn in the economy. Lower inflation reduces the risk of the Bank of England having to hike rates earlier than it may otherwise prefer to, allowing policy to focus on stimulating growth rather than warding off rising inflationary pressures."
Referring to the Bank's latest inflation report, to be published today, he added: "(The) inflation report is likely to bring forward when the Bank expects [7% ILO unemployment] from late-2016 to perhaps late-2015, given the recent flow of stronger-than-expected economic data. However, the Bank is also likely to place much emphasis on the fact that the 7% jobless rate is only a threshold and will not automatically trigger a rate hike."
The ONS said yesterday that prices in the education sector, overall, rose by 8.2% between September and October, compared with a rise of 19.1% between the same two months of 2012.
It added: "The downward contribution came principally from UK and EU student tuition fees, where the impact on the CPI of the rise in the cap for tuition fees introduced last year for new UK and EU students in England was smaller this year than in 2012. The smaller impact was due to the fact that many students were already paying the higher rate of fees."
Annual inflation on the old all-items retail prices index measure of inflation fell from 3.2% in September to 2.6% in October.
Average petrol prices fell 4.9p-a-litre month-on-month in October.
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