UK inflation fading faster than expected, says BoE governor

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Inflation is fading more rapidly than central bankers expected but the UK needs to see a continued retreat in services price growth from current levels, the Bank of England governor said on Wednesday.

Speaking after consumer price growth fell below the BoE’s 2 per cent target, to 1.7 per cent in September, Andrew Bailey said he was seeing a “good story” when it came to slowing headline inflation.

But he also warned that services inflation remained above levels that were consistent with the BoE’s objectives.

“Disinflation — and the UK is part of this — has actually taken place faster than we expected it to,” Bailey said at a meeting of the Institute of International Finance in Washington.

However, he added that “we’ve got to see services prices inflation come further down”.

The rate of price growth for services fell from 5.6 per cent to 4.9 per cent in September, driven by lower airfares, according to the Office for National Statistics.

Services inflation is seen by the BoE as a gauge of underlying price pressures, and the 4.9 per cent reading was well below the 5.5 per cent forecast published by the central bank when it last released a full assessment of the economy in August.

The fall in headline inflation to 1.7 per cent in September sparked speculation that the BoE would be willing to cut interest rates in both November and December following its initial quarter-point reduction in the summer.

Bailey suggested early this month that the bank could become more aggressive in reducing rates if inflation continued to head in the right direction.

He indicated on Wednesday, however, that questions were still open as to whether more stubborn domestic price growth would slow the progress towards sustained low inflation.

Bailey said the drop in headline inflation in September had been driven by beneficial movements in the price of energy and other commodities, but that it remained critical to see services price growth carry on “grinding down”.

He added that questions were still outstanding as to whether the economy had achieved “structural change” which could make services inflation more “sticky”.

Bailey said the question was whether this “domestic inflation piece is going to, in a sense, stop us getting so easily to sustained low inflation?”

He also said he was seeing “caution and uncertainty” among UK households despite increases in real incomes, adding this was reflected in the high savings rate.