Europe News

UK Oct inflation falls more than expected to 13-month low

The Bank of England
Alice Tidey | CNBC

British inflation unexpectedly dropped to its lowest rate for more than a year in October, offering reassurance for the Bank of England that it has ample time to allow the economy to strengthen before it raises interest rates.

Consumer price inflation fell to an annual rate of 2.2 percent in October from 2.7 percent in September, the Office for National Statistics said on Tuesday, echoing a similar sharp fall in inflation in the euro zone last month.

(Read more: Will BoE inflation report signal early rate hike?)

This is well below economists' forecasts of an average drop to 2.5 percent and is the lowest rate since September 2012, due to lower petrol prices and other transport costs and technical effects related to a multi-year programme of university tuition fee rises.

It is also far lower than the BoE's forecast in August that inflation would exceed 2.8 percent for the rest of the year, though it comfortably exceeds wage growth.

In August the BoE committed to keep interest rates on hold until unemployment falls to 7 percent, unless inflation threatened to get out of control. Unemployment in the three months to September was 7.7 percent.

(Read more: UK inflation eases as house prices rise)

Inflation has exceeded the BoE's 2 percent target since December 2009, in contrast to the euro zone where a sharp fall in inflation to 0.7 percent in October prompted the European Central Bank to cut borrowing costs to a record low last week.

In March, Britain's finance minister George Osborne changed the bank's mandate to clarify that it could take an extended period to return inflation to target if to do otherwise would significantly hurt growth.

Since then Britain's economy has expanded rapidly and grew by 0.8 percent in the three months to September. But total output is still below its 2008 peak, in contrast to almost all other major economies.

(Read more: Could QE spurdeflation, not inflation?)

The BoE will publish new economic forecasts on Wednesday. Tuesday's data are likely to strengthen economists' expectations that the central bank will revise down its short-run forecasts for inflation, as well as raising its growth forecast and bringing forward the date at which it expects unemployment to hit 7 percent.

The ONS said October's fall in inflation was driven by the biggest fall in transport prices since July 2009 as well as favourable comparisons to a year earlier, when the first and most significant of several annual rises in university tuition fees took effect.

An underlying measure of inflation, which strips out increases in energy, food, alcohol and tobacco, rose by just 1.7 percent, its smallest increase since September 2009.

However some economists see upward pressure on inflation over the next few months, when the impact of recently announced prices rises for household heating gas and electricity take effect.

Data also released by the ONS on Tuesday showed that factory gate prices rose by 0.8 percent, their slowest since October 2009, compared to economists' predictions of a 1.0 percent increase on the year.

House prices across Britain rose by 3.8 percent, the ONS said. This compares to annual increases of 6.9 percent and 5.8 percent recently reported for October by two of Britain's biggest mortgage lenders, Halifax and Nationwide.

Increases were concentrated in London, where prices are 9.4 percent higher than a year earlier, while in the rest of Britain they were just 2.1 percent higher.

A survey published overnight by the Royal Institution of Chartered Surveyors showed house prices hit an 11-year high in October as new British government incentives to support the housing market boosted the number of would-be home-buyers.