Inflation set for new five-year low

Inflation is set for a new five-year low when official figures are published today, showing the effect of the supermarket price war.

Falling petrol prices may also have helped drag the Consumer Prices Index (CPI) measure of inflation for September down from 1.5% to 1.4%.

The data from the Office for National Statistics (ONS) will show CPI below the Bank of England‘s 2% target for the ninth month in a row.

It is likely to leave the Bank’s rate-setters free of any immediate pressure to raise interest rates amid the continuing recovery in the wider economy.

But it is unlikely to provide much comfort to hard-pressed households as labour market figures the following day are expected to show pay increases still lagging behind, little changed from the latest reading of 0.6%.

Rate setters are looking for wage figures to start improving before hiking the cost of borrowing. It is also thought that the knock-on effect of the eurozone’s economic woes on the UK may stay the Bank’s hand.

CPI was last below 1.5% in September 2009, when it was 1.1%. A number of analysts expect it to drop to 1.4% for last month.

Howard Archer, chief UK and European economist at IHS Global Insight, said: “Consumer price inflation is seen dipping further to a five-year low of 1.4% in September.

“Furthermore, there is a realistic possibility that inflation could have fallen back even further given lower petrol prices and food prices being held down by the ongoing supermarket pricing war.

“This is good news for consumers’ purchasing power and gives the Bank of England extra scope to hold off from raising interest rates in the near term if it is worried about downside risks to growth or ongoing weak pay.

“However, earnings growth is likely to have seen only a modest pick-up in August, thereby remaining a constraint on consumers.”

Saumel Tombs of Capital Economics said an accelerating decline in food prices, spurred by the fall in agricultural commodities, should see CPI dipping to 1.3%.

Scotiabank’s Alan Clarke expects inflation to remain stable at 1.5% but said it would be the “calm before the storm” with next month’s figures showing bigger effects from the supermarket price war and CPI heading towards 1% in December.

Investec’s Victoria Clarke has pencilled in a 1.4% inflation rate for September, with larger petrol price declines compared to the same time last year dragging on the rate.

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Inflation set for new five-year low