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Inflation slumped to a five-year low last month as the worst recession since the Second World War put downward pressure on prices.
Official figures today showed the Consumer Prices Index fell from 1.6% in August to 1.1% in September.
It was the lowest level since September 2004, weaker than the 1.3% expected by City economists, and well below the 2% inflation target.
The fall came amid fears that the economy did not grow in the third quarter of the year — meaning the recession is not yet over in the UK.
Sterling tumbled to a five-month low against the dollar — $1.5707 — and to a six-month low against the euro — 1.0627 — on signs that the UK economy is still in intensive care.
It recovered later, but Duncan Higgins, senior analyst at Caxton FX, said: “This is bad news for the pound. We are unlikely to see the pound find much support over the short term, and it is on course to fall to parity with the single currency.”
Forecasters expect inflation to start rising again in the coming months due to higher oil prices year-on-year and the reversal of the VAT cut in January.
But many argue it will remain subdued as rising unemployment and a muted recovery from recession keep a lid on prices.
It highlighted the balancing act facing the Bank of England and Governor Mervyn King ahead of next month's key decision on interest rates and its £175 billion quantitative easing (QE) programme.
The Bank must decide whether to pump even more money into the economy to stimulate growth, or put the programme on hold.
Trevor Williams, chief economist at Lloyds Banking Group, said: “The economy is in the grip of low inflation, with lots of spare capacity. I expect the Bank to extend QE. Withdrawing the stimulus now would be a real shock.”
But James Knightley of ING said the Bank will have to hike interest rates from the current low of 0.5% in spring 2010 to control inflation.
“It is looking quite likely that we will see inflation pushing back well above 2% in early 2010,” he said.
The biggest contributor to the fall in inflation was cheaper gas and electricity bills which were 7.3% lower than a year ago. Food prices were also down but the cost of clothes and transport increased.
Reader views (4)
If America is not suffering this inflation /deflation trouble then lets join the dollar or if Europe haven't this trouble then join the Euro. Why do the simplest solutions always escape our "Leaders"
T H Leeds
- Thomas Hayes, Leeds UK, 13/10/2009 21:31
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Even with hteir massaged figures, the Government still has positive inflation.
Because of the Government actions (and inactions) the pound is falling against all the other currencies, which automatically leads to higher prices.
So much for the panicky fear of 'deflation' - which doesn't look a bad thing from my low income perspective !
- Cap, London, 13/10/2009 20:51
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Yeah, except for those great monopolies/cartels gas, petrol and tax.
- Paul B, London, 13/10/2009 20:25
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I really wish they would look at the actual prices people pay. These have gone UP not down.
- Stephen, London, UK, 13/10/2009 18:45
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