Inflation tipped to drop to six-month low of 2.5% as price war on petrol eases cost of living squeeze

• Figures tipped to show inflation fell to 2.5% in October
• Drop caused by falling fuel prices and slowdown in food price rises
• Bank of England due to publish key inflation report on Wednesday
  

By THIS IS MONEY REPORTER

Updated: 04:58 EST, 12 November 2013

Breaking: Inflation beats expectations and drops to 2.2% as petrol price war eases cost of living squeeze

Inflation dropped to 2.2 per cent today from 2.7 per cent, far below the 2.5 per cent it was tipped to fall to. Read the full report.

Inflation is expected to ease to a six-month low of 2.5 per cent for October when the Office for National Statistics releases its consumer prices index today.

The ONS data come 24 hours before the Bank of England publishes its key inflation report on the UK economy, which will reveal whether it is sticking to its original forward guidance blueprint for the path of interest rates.

Falling petrol prices are one of the main drivers behind expectations for the fall in the inflation rate from 2.7 per cent n September.

Drop: Prices fell on the forecourts during October.

The Bank of England is due to publish its latest quarterly inflation report on Wednesday amid increasing market speculation it will be forced to revise its policy of forward guidance, which currently sees a rise in interest rates in the second half of 2016.

In August, the Bank linked any rise in interest rates to a fall in unemployment to 7 per cent, unless inflation threatened to spiral or financial stability was threatened.

Last month, the unemployment rate was 7.7 per cent unchanged from a month earlier when it fell 0.1 per cent from 7.8 per cent in the three months to August. But some economists believe unemployment will fall faster than the Bank expects and rates will have to rise sooner.

Last week think tank the NIESR said it expected the Bank to have to raise rates in 2015, due to the economy potentially overheating and house prices rising too swiftly.

Even if inflation dips to 2.5 per cent, the ONS figures will see inflation remain stubbornly above its 2 per cent target - and continuing to squeeze incomes as wage increases remain behind the cost of living.

Drop: Food price rises have slowed during October, contributing to a fall in inflation.

Inflation hit a 2.9 per cent high in June, having risen from 2.4 per cent in April.

Analysts at Barclays expect to see the rate fall slightly, to 2.6 per cent, for October. Scotiabank's Alan Clarke forecasts a drop to 2.4 per cent, as slowing food inflation and a smaller contribution from university tuition fee hikes - which have impacted inflation figures since they were brought in last year - take effect.

Analysts at Capital Economics also predict a sharp drop to 2.4 per cent and CPI reaching its 2 per cent target by the first half of next year.

Howard Archer, of IHS Global Insight, predicts a 2.5 per cent rate, and also cites indications that high street retailers cut prices during October amid a bout of promotional activity and discounting.