UK inflation falls below 2 percent

U.K. inflation fell to a three-year low in September, falling below the Bank of England’s 2 percent target and raising the chances of another interest rate cut in November.

Consumer prices rose by 1.7 percent on an annual basis, down from 2.2 percent the month before, the Office for National Statistics said today. That was below analyst expectations of 1.9 percent.

Prices barely budged month-on-month, increasing by only 0.1 percent.

The ONS said that the inflation slowdown was largely down to transport costs, which benefitted from falls in the price of air fares and fuel.

The fall in inflation was broad-based: service price increases, which have been a source of concern for experts because they have been so persistent, slowed to 4.9 percent on an annual basis from 5.6 percent in August.

There was an even clearer slowdown in factory gate inflation, with prices falling 0.5 percent on the month and 0.7 percent on the year, due largely to a sharp drop in oil prices.

For the Labour government, the news represents a positive development on two fronts: it gives the Bank of England scope to further lower interest rates, making it cheaper for the government to borrow. Then it also gives Chancellor Rachel Reeves headroom to spend more without having to worry about overheating the economy.

One element bucking the trend was owner- occupiers’ housing costs — a measure of how much it costs to own a house, which crucially includes mortgage interest costs. That rose by 0.1 percent to run at an annual rate of 7.2 percent.

While the Bank of England cut its key interest rate to 5 percent in August, it is still high compared to the average of the past decade, hitting homeowners who have to refinance their mortgages.