UK inflation fell sharply to 1.7% in September, down from 2.2% in August and well below expectations of 1.9%.
This marks the lowest level in over three years and increases the likelihood of more aggressive rate cuts by the Bank of England, according to Evelyn Partners.
Core inflation, which excludes food, energy, alcohol, and tobacco, also eased to 3.2% from 3.6%.
Rob Clarry, investment strategist at Evelyn Partners, said: “Not only did the annual inflation rate for September come in substantially lower than expectations, but there was a notable drawback in key services inflation.”
He further noted that Bank of England Governor Andrew Bailey had previously indicated that the Monetary Policy Committee (MPC) could be “a bit more aggressive” with rate cuts, and this recent data provides the evidence to support that approach.
Clarry highlighted the decline in services inflation, which fell from 5.6% to 4.9%, stating that “these measures are a better gauge of domestically generated inflation than the headline CPI measure, which is more influenced by external factors such as global energy prices.”
While there is optimism about potential rate cuts, Clarry warned that inflation could rise again in the coming months due to the recent 10% increase in the energy price cap. Nonetheless, with the latest inflation and labour market data, Clarry believes the MPC “surely now has the evidence it needs” to take more decisive action on rate cuts.
Markets are now pricing in quarter-point cuts at the next three MPC meetings, with the pound responding by falling this morning.
