The U.K.’s inflation rate had the biggest drop in at least 11 years in October as oil and food costs fell and the economy slipped toward a recession.
Consumer prices rose 4.5 percent from a year earlier, compared with 5.2 percent the previous month, the Office for National Statistics said today in London. The median forecast in a survey of 27 economists was 4.8 percent. The rate has now exceeded the Bank of England’s 2 percent target for a 13th month.
Central bank Governor Mervyn King said last week that the economy is probably in a recession, and policy makers will cut borrowing costs as low as needed to stave off deflation. The bank forecasts inflation will slow below the government’s 1 percent lower limit unless it reduces the benchmark interest rate from the current 3 percent.
“Inflation is now yesterday’s story,” said Matthew Sharratt, an economist at Bank of America Corp. in London. “It’s going to fall well below the target next year. This leaves the door wide open for a deep cut in interest rates in December.”
The pound pared gains against the dollar and the euro after the report. The U.K. currency was at $1.4964 and at 84.26 pence per euro at 10:05 a.m. in London.
Consumer prices fell 0.2 percent on the month, the first decline for October since 2001, the statistics office said. Lower oil, transport, and food costs pushed the inflation rate down by 0.7 percent, the biggest drop since records began in 1997.
Oil Prices
Oil prices have fallen by about two-thirds after climbing above $147 a barrel for the first time in July, while corn and wheat prices are also down by more than half from records reached earlier this year.
J Sainsbury Plc, the third-largest U.K. supermarket chain, posted earnings that beat analysts’ estimates on Nov. 12 and said its price cuts lured affluent customers away from rivals.
Slower growth is sparking concerns of deflation. U.K. manufacturers’ raw material costs and output prices fell at the fastest pace in 22 years in October, and the central bank’s forecasts show the economy contracting through most of next year.
King said on Nov. 12 the bank is “prepared to cut bank rate to whatever level is necessary,” to keep inflation at the target, and didn’t rule out putting the benchmark at zero. The bank’s 1.5 percentage point reduction this month was the biggest since 1992.
King also said he wouldn’t be surprised if the retail price index fell below zero to reflect cuts in the interest rate. The retail price inflation rate, used in wage negotiations, dropped to 4.2 percent in October from 5 percent the previous month. The decrease was the biggest since January 1993, the statistics office said.
So-called core inflation, which strips out costs of food, energy, tobacco and alcoholic beverages, slowed to 1.9 percent from 2.2 percent in September.