At a glance, last month’s sharp drop in the headline inflation figure to 1.7% tells the Bank of England all it needs to know when it considers whether to cut interest rates next month.
The plunge from 2.2% in August puts the rate of prices growth well below the central bank’s 2% target and back in territory that we last saw in early 2021 – long before the Russian invasion of Ukraine sent energy prices rocketing.
Before the inflation figures were published, investors were 80% sure of a quarter of a percentage point cut to interest rates to 4.75% when policymakers meet next month.
Afterwards those odds tightened further to 90% and hopes are now growing that rates could fall more aggressively next year, as the Bank governor, Andrew Bailey, hinted to the Guardian earlier this month should inflation continue tumbling by more than expected.
The financial markets reacted accordingly to the prospect of a sharper downward trajectory. Sterling began to slide on currency markets as soon as the September inflation figure appeared, continuing a fall that has dragged the pound down from $1.34 late last month to almost $1.30.
Not so fast will be the message from many of the nine officials on the Bank’s rate-setting monetary policy committee (MPC). They will point out that the most recent fall in inflation relies on the tumbling oil price and how it feeds through to sectors such as transport.
The Office for National Statistics said the average price of petrol fell by 5.5 pence a litre between August and September 2024 to stand at 136.8p.
MPC members will be spooked that food prices are continuing to rise strongly when they would usually be affected by the falling cost of transport.
The main indicator of more persistent inflationary trends, the core inflation figure that strips out energy and food because they can be volatile, stood at a much higher rate of 3.2%.
Adding to the picture of an economy still struggling with rising prices, Tuesday’s jobs figures showed regular private sector pay growth – a measure closely watched by the Bank of England – eased only slightly from 5% to 4.8%.
Some MPC members will think that a rate of wages growth of more than twice the rate of inflation will force companies to keep prices higher for longer to maintain their profits.
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This is a hawkish view and unlikely to be the one to prevail. Much more relevant is that all the measures of prices and wages are on the way down and indicate a weakening economic outlook – one that needs a boost from lower borrowing costs.
The oil price is dictated more these days by economic decisions in Beijing than conflict in the Middle East. And China, the world’s largest consumer of oil, is in the midst of a dramatic slowdown brought on by a housing bubble bursting in spectacular fashion.
Across the Atlantic, a boom in US economic growth is coming to an end. And the rest of Europe continues to labour under the twin pressures of the Ukraine war and lower demand from its chief export destinations – China and the US.
It is in this global context that the MPC will consider where next for interest rates. And one that adds to the likelihood they will now fall a bit faster than previously expected.