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Inflation falls to its lowest in three years after UK caps energy bills

Tom Belger
Finance and policy reporter
Inflation data was released on Wednesday. Photo: David Cliff / SOPA Images/Sipa USA)

UK shoppers received a boost on Wednesday as figures showed inflation fell to its lowest level in nearly three years in October.

Consumer prices rose at an annual rate of 1.5%, down from 1.7% in September, according to the Office for National Statistics (ONS).

A UK government cap on energy bills introduced by former prime minister Theresa May limited price increases just as her successor Boris Johnson takes Britain to the polls.

The ONS highlighted the price cap and said it had pushed down electricity and gas prices for 15 million British homes.

READ MORE: Biggest fall in UK employment in four years as firms axe part-time staff

Howard Archer, chief economic adviser to the EY Item Club, said the figures were “helpful for consumer purchasing power,” but could fan expectations of a Bank of England rate cut if the economy continues to struggle.

The rate of inflation marks the lowest reading on the consumer price index since November 2016, with gas prices down 8.7% month-on-month and electricity costs down 2.2%.

Britain's Prime Minister Boris Johnson and former PM Theresa May attend a National Service of Remembrance at The Cenotaph in Westminster, London, Britain, November 10, 2019. REUTERS/Toby Melville TPX IMAGES OF THE DAY

Economists polled by Reuters had expected the consumer price index to fall only to 1.6%.

The Bank of England said recently that inflation would probably dip even further to 1.25% early next year, again highlighting the cap on energy bills.

But it said it was likely to be back above the central bank’s 2% target towards the end of its three-year forecast period.

“The figures do little to change our view that inflation will spend more time below 2% than above it in 2020 and that if Brexit is delayed further, interest rates will be cut, in May 2020,” said Ruth Gregory, senior UK economist at Capital Economics.

It comes after figures on Wednesday showed continued growth in real wages in another boost for UK workers, though the pace of earnings growth slowed in the three months to September.

READ MORE: UK avoids recession but growth slumps to worst in a decade

The official labour market figures showed the unemployment rate had fallen to its joint lowest level since 1974 at just 3.8%.

But the ONS also said the total number of people in work in Britain had fallen at its fastest pace over a quarter in more than four years.

One economist said the labour market was “showing more signs of strain” as the ONS highlighted record quarterly declines in women in work, down 93,000, and in part-time workers, down 164,000. It outweighed a net increase in full-time posts of 106,000.

The fall in both employment and unemployment can be explained partly by a rise instead in the ‘economic inactivity rate’ —the number of people neither working or looking for work.

On Monday the ONS also released UK GDP figures for July to September, showing Britain had avoided a recession but annual growth had slowed to its lowest pace in a decade.