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UK inflation rate of 1.2% is lowest in five years

UK inflation fell to a five-year low of 1.2% in September from 1.5% the month before, official figures show.

The rate – as measured by the Consumer Prices Index – is the lowest since September 2009, when it was 1.1%.

Lower energy and food prices helped to cut the rate, while the Office for National Statistics (ONS) also cited cheaper transport costs as a factor.

The news sent the pound lower as analysts said a rate rise was now not likely until well into next year.

The Retail Prices Index measure of inflation fell to 2.3% from 2.4% in August.

Rate timing

The CPI is the rate the Bank of England targets and it is charged with keeping inflation at about 2%.

The UK economy is the fastest growing in the developed world, something that would normally prompt a rise in interest rates.

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While some economists had speculated that the Bank of England might raise interest rates from the current record low of 0.5% before the end of the year, most had expected a rise early next year.

However, the latest inflation figures means a rate rise could be pushed back further.

“There is little sign of any inflationary pressures on the horizon,” said Martin Beck, senior economic advisor to the EY Item Club.

“The chances of the MPC voting for an increase in interest rates this year have fallen to practically zero. Unless inflation begins to pick up soon, it is likely that the first hike will be pushed out towards the middle of next year, if not later.”

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Analysis: Brian Milligan, Personal finance reporter, BBC News

September’s inflation figures are no longer as critical as they were. They used to determine the level of a wide range of benefits. But most are now subject to the cap of a 1% annual rise, which began in April 2013. If the Conservatives win the next election, those same benefits will also be subject to a two-year freeze.

Disability benefits are one exception. If approved by the government, they will now be uprated by 1.2% next year.

In theory, the state pension is also set by September’s inflation figures, but in this case, it will be protected by the “triple-lock” of inflation, earnings or 2.5% – whichever is the highest.

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Ben Brettell, senior economist at Hargreaves Lansdown, said: “With inflation predicted to fall further in the coming months, those hoping for a pre-election interest rate rise are highly likely to be disappointed.”

The pound reacted immediately to the news, falling against both the euro and the dollar.

Sterling is at $1.597, its lowest since November last year.

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Wages lag

The ONS figures showed the cost of fuel has fallen 6% from September last year, while food prices are down 1.5% as the supermarket price wars begin to take effect.

The fight for market share between leading supermarkets is intensifying and the downward pressure on food prices is expected to continue to press down on inflation.

Earlier, a survey by the British Retail Consortium (BRC) reported sales at their weakest level in six years.

It said shoppers had put off seasonal purchases because of the warm weather, It also said annual food prices had fallen for the first time in five years.

However, the ONS said that the biggest factors behind the fall in September’s inflation rate were cheaper transport costs (notably sea fares and air fares) and lower prices for a range of recreational goods, including items such as tablet computers and games consoles.

Despite the fall in inflation, average income is not keeping up. Last month’s official figures showed average earnings, excluding bonuses, in the May to July period rose by 0.7% from a year earlier.

New figures on employment and income are being released on Wednesday.

Benefits

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The Chancellor, George Osborne, said the fall in inflation was good news for families and pensioners: “It means the increase in prices is much lower than expected for families. It also means,… the state pension is going to go up by more than double the rate of inflation.”

Shadow treasury minister Catherine McKinnell said: “The squeeze on working people continues despite this fall in the rate of inflation. Labour’s economic plan will tackle the cost-of-living crisis and earn our way to higher living standards for all, not just a few at the top.”

Until December last year, the CPI rate of inflation had outstripped the Bank’s 2% target every month for five years, but it has now been below that for nine months in a row.

Bank of England governor Mark Carney has to write a letter to the chancellor if it deviates by one percentage point from the 2% benchmark.

The September inflation figure was typically the one that the government used for setting increases in state pension and a range of other benefit levels.

From next April, it is capping most benefit increases by 1%, although pensions are governed by a different formula that guarantees they will not rise by less than 2.5%.

Read more: https://www.bbc.com/news/business-29611742

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