Inflation Softens, But Interest Rates Still Set to Rise

A big fall in petrol prices helped to ease inflation to 2.4 per cent in September, but economists remain convinced that interest rates will rise. While the drop in inflation was expected, the underlying factors driving price pressures mean that the City is bracing itself for a rate hike. The Bank of England's governor, Mervyn King, warned that the fall in energy costs may not persist, and other prices are likely to rise, keeping headline inflation elevated.

Key Takeaways:

• The fall in inflation to 2.4 per cent in September was expected, but the underlying factors driving price pressures suggest that interest rates are set to rise.
• Mervyn King, Governor of the Bank of England, warned that the fall in energy costs may not persist, and other prices are likely to rise, keeping headline inflation elevated.
• The "core" inflation rate, which strips out volatile items such as petrol, food, and drink, accelerated from 1.1 per cent in August to 1.4 per cent, its fastest pace since February.
• Paul Dales, at Capital Economics, believes that the sharper-than-expected gain in the core inflation rate seals the deal for a rate hike at the next monetary policy committee meeting.
• The retail price index (RPI), a measure of inflation that includes mortgage interest payments, rose to an eight-year high of 3.6 per cent, driven primarily by more expensive mortgages after the August interest rate rise.
• The rise in RPI is expected to push inflation higher still, in time for the wage bargaining round, and may lead to higher pay demands and price pressures.
• John Butler, at HSBC, believes that the Bank of England has expressed a concern that as high energy costs subside, other prices will rise, keeping headline inflation elevated.

Statistics:

• Inflation softened to 2.4 per cent in September, down from 2.5 per cent in August.
• The "core" inflation rate accelerated from 1.1 per cent in August to 1.4 per cent in September, its fastest pace since February.
• The retail price index (RPI) rose to an eight-year high of 3.6 per cent in September.
• The rise in petrol prices has fallen by about one-quarter since their peak in August.
• The cost of university tuition fees increased from £1,175 to £3,000 for new students in September.

Sources:

• JAMIE CHISHOLM, "Inflation eased to 2.4pc in September but is likely to keep rising", The Sunday Times, September [no date available]
• Mervyn King, Governor of the Bank of England, speech, September [no date available]
• John Butler, HSBC, cited in the article
• Paul Dales, Capital Economics, cited in the article