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UK inflation rate: Three-year low could spur bumper Christmas spree

Mark Carney acknowledged that "in the event of a no-deal Brexit, the sterling exchange rate would probably fall, CPI inflation rise and GDP growth slow": REUTERS
Mark Carney acknowledged that "in the event of a no-deal Brexit, the sterling exchange rate would probably fall, CPI inflation rise and GDP growth slow": REUTERS

INFLATION fell to a three-year low on Wednesday, raising hopes of a bumper Christmas as consumers spend freely and leaving the Bank of England with ample room to cut interest rates.

In October prices rose at an annual rate of just 1.5% according to the Office for National Statistics, down from 1.7% the previous month, thanks to a fall in the cost of energy. That should free up a spending splurge ahead of the election and into the holidays.

Simon French at Panmure Gordon said: “The energy price cap announced in late 2018 which initially hurt household budgets is now having the opposite effect. The long-term sense of this policy remains questionable, but in the short term UK households won’t care as the temperature drops.”

Inflation, now at its lowest since late 2016, is set to fall further still in the coming months. The Bank of England, in its latest Monetary Policy Report, predicts that inflation could fall as low as 1.2% or 1% by mid 2020.

French added: “The recent rally in the value of the pound can be expected to push inflation lower still in the coming months as the cost of imports falls. This Christmas there will be a battle between retailers and consumers on who wins from these lower import costs. Shops will be trying to rebuild squeezed profit margins, but it will be a tough task as consumers have held the whip hand in recent years.”

Two members of the Bank’s rate setting committee last week voted for an immediate rate cut to boost the economy. The inflation figures give the Bank further wiggle room.

Howard Archer at EY Item Club said: “Inflation dipping more than expected to 1.5% in October will also likely fan expectations that the Bank of England will cut interest rates before too long if the economy fails to pick up from its current struggles.” The housing market also seems to be holding up relatively well given Brexit uncertainties. While prices in London dipped for the 15th successive month in September according to the ONS, the rate of decline has eased.

Jonathan Hopper, managing director of Garrington Property Finders, said: “London’s pain is easing. While the capital retains its unwanted accolade as the region where property prices are falling fastest, the rate of decline has slowed sharply. “In the space of just a month, London prices have gone from a 1% annual fall to a more palatable 0.4% annual slide.”

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