Inflation has slumped to its lowest rate for five years, hitting 1.2% in September and taking pressure off the Bank of England to raise interest rates in coming months.
The news took financial markets by surprise and the pound weakened against the euro and the dollar as traders pushed back bets of when the central bank will start to raise rates from their current record low.
Financial markets are now pricing in the first hike in borrowing costs in mid-2015. Until now the market consensus had been the early months of next year, though some economists had warned growth was softening and price pressures were benign.
“We have long been expecting the Bank of England to first raise interest rates from 0.50% to 0.75% in February – but it is looking ever more likely that the Bank will delay acting until nearer mid-year,” said Howard Archer, an economist at IHS Global Insight.
“Much will clearly depend on just how well UK growth holds up over the coming weeks and months, as well as how much wages move up in the 2015 pay settlements,” he added.
Economists had been expecting inflation on the consumer price index (CPI) measure to ease back only slightly in September to 1.4% from 1.5% in August.
But the Office for National Statistics said stronger post-holiday falls for airfares this year and price moves for electronic goods such as laptops had helped pull inflation down to its lowest level since September 2009. Food and fuel prices also fell on the year amid a supermarkets price war and a sharp fall in crude oil prices. Excluding volatile items such as food and fuel, there was still a let-up in price pressures and core inflation stood at 1.5%, down from 1.9% in August.