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UK inflation falls unexpectedly in September, cooling interest rate hike chatter

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Governor of the Bank of England Andrew Bailey l
Governor of the Bank of England Andrew Bailey leaves Downing Street, London, Britain, September 16, 2021. Photo: Hannah McKay/Reuters

New data from the ONS showed on Wednesday in London that inflation had fallen in September, pulling back to 3.1% from 3.2% in August. 

The fall was due largely to last August’s Eat Out to Help Out discount dropping out of the figures, as well as price pressures across the board. 

Inflation is highly likely to come in higher for October, when the hike in the energy price cap filters into the figures. It means the pressure on household budgets is a long way from over.

Petrol prices fuelled much of the rise in September, with the cost of fuels and lubricants up 17.8% in a year. This time last year they had risen off the bottom to 113.3 pence per litre, but in September they hit 134.9 pence, their highest in eight years. It means filling up a 50l car cost £10.80 more than the same time last year.

The cost of materials for home repairs and improvements rose an eye-watering 10.4% over the year. Shortages across the building sector of everything from fence posts to roof tiles mean tradespeople are paying through the nose for materials, and passing the cost on to homeowners.

Read more: FTSE slips as investors digest falling UK inflation

“Global shocks have pushed up prices around the world, and we are working with businesses and international partners to address these pressures," said chancellor Rishi Sunak. 

“We are supporting people with the cost of living, including through a new £500m support fund to help vulnerable households, the energy price cap, and assistance with energy bills through the winter.”

Watch: What is inflation and why is it important?

Bank of England interest rate hike?

As inflation cools so does talk in the market about a potential early interest rate hike in November.  

"We expect inflation to remain high and volatile in the short-term, but we do not expect an imminent rise in interest rates from the Bank of England," said Hannah Audino, economist at PwC.

Audino notes that the Bank will likely need more data before it makes a decision.

PwC expects current inflationary pressures to largely be transitory and to gradually fade as supply bottlenecks and shortages normalise and energy prices stabilise. Although, it notes, the Brexit effect may mean these pressures persist for longer in the UK than other advanced economies.

PwC says that a rise in interest rates could jeopardise the UK’s economic recovery, especially given mounting risks to the economic outlook, including supply chain issues and the huge disparities we are seeing in the labour market. 

Read more: Seven in 10 Brits mistakenly believe cryptocurrencies are regulated by FCA

"With some sectors in stress due to shortages and others in slack, it is difficult for the Bank to know which way to turn with monetary policy," says Audino. 

The uncertainty on interest rates is also affecting savers. 

"Inflation is making a mockery of savings rates. The highest rate on the market right now is 2.05%, if you fix for five years," said Sarah Coles, personal finance analyst at Hargreaves Lansdown. 

"The most competitive easy access account is offering 0.66%, which is streets ahead of the typical high street rate, but is still a drop in the ocean compared to inflation at 3.1%. With rate rises expected before Christmas, it’s tempting to become a wait-and-see saver, but it’s a risky strategy."

Watch: Will Interest rates stay low forever?

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