Britain's Inflation Rate Hits 27-Year Low

Strategic Insights -

Britain's underlying inflation rate fell to 2.2 percent in September, the lowest annual rate since the devaluation of sterling in November 1967, due to cheaper petrol and supermarket price wars. The unexpected fall prompted the Governor of the Bank of England, Eddie George, to soften his hawkish line on interest rates, stating that the City had exaggerated its fears of rapidly rising inflation. However, the decrease in inflation comes at a cost for Britain's 11 million pensioners, as the Government relies on the September Retail Prices Index for its annual uprating of benefits.

Key Takeaways:

  • The all-items annual inflation rate fell from 2.4 percent to 2.2 percent in September, a rate not seen for almost 27 years.
  • Inflation excluding mortgage interest payments dropped from 2.3 percent to 2.0 percent, also a 27-year low.
  • Food prices fell by 0.8 percent last month, and are only 0.5 percent higher than a year earlier.
  • Retailers have been unable to persuade customers to pay more, with clothing and footwear prices unchanged and household goods up by only 0.2 percent.
  • The price of clothes, shoes, and household goods rose last month as new stock arrived in shops, but increased less sharply this September than a year ago.
  • Downward pressure on inflation will be maintained by electricity discounts, cheaper long-distance telephone calls, and the possibility of a forecourt war among petrol retailers.
  • The steady decrease in the number of people out of work and claiming benefit has yet to have any impact on pay deals, with average earnings growing at 3.75 percent a year since the start of the year.
  • All state pensions, as well as unemployment benefit, sickness benefit, and maternity allowance will automatically rise next April by September's 2.2 percent RPI increase.

Statistics:

  • The all-items annual inflation rate decreased from 2.4 percent to 2.2 percent in September.
  • Inflation excluding mortgage interest payments dropped from 2.3 percent to 2.0 percent.
  • Food prices fell by 0.8 percent last month.
  • Clothing and footwear prices remained unchanged.
  • Household goods prices rose by only 0.2 percent.
  • The price of clothes, shoes, and household goods increased less sharply this September than a year ago.
  • Average earnings grew at 3.75 percent a year since the start of the year.
  • The September Retail Prices Index was 2.2 percent.

Sources:

  • The Government's announcement (date: not specified)
  • The Central Statistical Office
  • The Bank of England (speech by Governor Eddie George, date: not specified)
  • The Employment Department (statistics on unemployment, date: not specified)
  • The UK Parliament (notes on benefits, date: not specified)