Inflation in the UK has fallen for the first time in more than a year, increasing the chance that the next move in interest rates will be down.
The annual consumer price index, which is the Bank of England's target measure, fell from 2.5 per cent in September to a weaker-than-expected 2.3 per cent in October, according to official figures.
The lower-than-forecast pace of price rises, coupled with Monday's sharp fall in factory gate inflation, will put pressure on Mervyn King, Bank of England governor, when he produces the quarterly inflation report today, to explain why he remains concerned about inflationary risks.
Market reaction suggested traders were now placing bets that the Bank would be more likely to consider a cut in interest rates.
Gilts jumped and sterlinggave ground, falling to a near two-year low against a strong US dollar as traders adjusted yield expectations.
George Buckley at Deutsche Bank said: “With inflation expectations seemingly firmly anchored around the Bank's 2 per cent target, the conditions remain in place, we believe, for further monetary easing during 2006.”
The core measure of CPI inflation, which excludes the more volatile energy, food, alcoholic drinks and tobacco items, rose 0.1 per cent in October compared with September while the annual rate dropped from 1.7 to 1.6 per cent.
The Office for National Statistics said one of the main reasons for the fall in the rate of inflation was a slower increase in prices of financial services. Housing and fuel prices, the latter aided by ultra-low sulphur petrol falling about 1.3p per litre, also contributed to the decline. Increased supplies of some fresh vegetables, particularly onions, tomatoes and cauliflowers, had reduced food inflation. However, upward pressure came from an increase in household gas and electricity bills.
RPIX, retail price inflation excluding mortgage payments, was 2.4 per cent against September's 2.5 per cent. RPI inflation fell 0.2 per cent last month to 2.5 per cent from 2.7 per cent, the lowest since April 2004. RPI and RPIX both include some housing costs and the fall in both reflected the cooling housing market.
However, yesterday's report from the Royal Institute of Chartered Surveyors suggests house prices are falling at their slowest pace in more than a year and new buyer inquiries are at their most buoyant in two years.
