The Bank of England has warned inflation is likely to dip below 1 per cent in the next six months as UK wage growth remains weak.
Consumer Prices Index inflation fell to 1.2 per cent in September, down from 1.9 per cent three months earlier, reflecting declining food and energy prices during the period.
The September figure was also significantly below the August projection, when the Bank predicted CPI of 1.7 per cent.
In its latest inflation report, published today, the Bank says: “Inflation has fallen further below the MPC’s 2 per cent target, reflecting the impact of lower food, energy and import prices and some continued drag from domestic slack.
“Inflation is expected to remain below the target in the near term, and is more likely than not to fall temporarily below 1 per cent at some point over the next six months.
“It then rises gradually back to the target as external pressures fade and unit labour cost growth picks up.”
The Bank also anticipates four-quarter growth will fall back to its “historical average rate” as a result of the weaker global outlook and subdued domestic demand.
This projection, outlined in Chart 1 (left), assumes overseas growth is slower than in August, particularly in the euro area.
“The main downside risk stems from weaker euro-area activity, which would weigh on UK exports and could be associated with a further rise in financial market volatility,” the Banks says.
“But there are also risks to the upside – for example, greater momentum in US growth or larger impacts than expected from European Central Bank or Bank of Japan policy actions.”