"With prices staying stubbornly high and another surge expected, a gentle rise in interest rates before the end of the year still looks likely"
CPIH inflation, which includes owner occupiers’ housing costs, rose by 2.9% over the year, down from 3.0% in August.
Restaurants and hotels made the largest downward contribution to the change in the 12-month inflation rate between August and September.
However the ONS notes that the large downward contribution to change from restaurants and hotels is a base effect, in part because of the recovery of restaurant and cafe prices in September 2020 following August’s Eat Out to Help Out scheme.
As a result, many economists and industry experts still believe the Bank of England could raise interest rates in the near future.
Rachel Winter, associate investment director at Killik & Co, said: “Against all odds, inflation has slowed. However, this is likely a one-time blip as a number of contributory factors will likely create inflationary pressure in the next month, most notably the global price increase in fuel. This, combined with the fallout from supply chain issues caused by the pandemic, an ongoing skilled labour shortage, and rising food prices due to higher production costs, has created the perfect storm and will no doubt impact inflation soon.
“With so many economic obstacles in play, all eyes will be on the Bank of England to intervene. While getting the Bank to agree to raise interest rates may feel like pulling blood from a stone, progress appears to be on the way, with Andrew Bailey suggesting that the central bank may soon be forced to act to curb inflation, though it is unclear when this will be."
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, commented: "The latest CPI reading has come in a touch lower than August at 3.1%, after the artificial blip from last year’s Eat Our to Help Out scheme dropped out of the figures.
"It is forecast to reach 4%, double the Bank of England’s target by the end of the year, and potentially 5% by next April. With prices staying stubbornly high and another surge expected, a gentle rise in interest rates before the end of the year still looks likely if there is any chance of keeping a Goldilocks economy within reach.
"But the recovery is already judged to be cooling rapidly due to supply chain issues, labour shortages and energy price surges. Avoiding the bad dream of stagflation will still be the priority, rather than the lofty aims of a goldilocks economic utopia. If gas prices continue to spike and power rationing is introduced by energy intensive industries, economic growth could be knocked back into a downturn. While there is still dissent around the table, and there is a chance this slightly lower reading may hold off members of the Monetary Policy Committee from voting for a rate rise in November, the financial markets have largely priced a rate rise in by the end of 2021, followed by further rises next year.
"A certain amount of nervousness ripples through the financial markets at the very thought of a rate hike, given that investors have become somewhat used to this era of ultra-low rates, so this edge downwards in CPI in September may provide some short term relief.
"But even if the Bank of England does raise the base rate by a few notches in the months to come, it isn’t forecast that it will go much beyond 1% next year.
"That is because central bank policymakers still believe inflation is transitory. Like porridge without enough milk, it’s sticking around for a lot longer than was previously thought, but is expected to ease off as pandemic supply chain issues finally lift.
"However ultimately we still don’t know if rising prices will become the new ‘new normal’ or if they’re just a temporary result of us emerging from a pandemic and a year of lockdowns and restrictions. There are worries they will linger for a lot longer. Make UK, the manufacturers organisation has warned that inflation risks becoming baked in, and the Food and Drink Federation has also warned that soaring ingredients prices will lead to a bubbling up of prices in bars and restaurants.
"Even if there is a rise of the base rate to 1% it would see interest rates back at 2009 levels, a time when the economy was in the recovery position following the financial crisis, but would still be very low on a historic basis.
"Even so unwinding mass bond buying programmes, which has made borrowing cheap is also likely to be a slow process. The last shock governments want right now is to see the rate of interest they have to pay on their debts escalate, and central banks will be keen to avoid any kind of ‘taper tantrum’ on the bond markets, witnessed in 2013 when US treasury yields rose sharply after the Federal Reserve announced a roll back of its quantitative easing programme. So rate rises are likely to be incremental, accompanied by soothing words of assurance that soaring inflation will ultimately end up being fleeting."
Richard Carter, head of fixed interest research at Quilter Cheviot, added: “This morning’s ONS data shows UK inflation remained elevated in September, although some of the volatility caused by last year’s Eat Out to Help Out scheme dropped out of the numbers and dampened down the 12-month CPI figure to 3.1%.
“Job vacancies continue to sit at a record high of 1.1 million vacancies and will add upward pressure to wages which we will likely see feed through the system in the months ahead.
“The bigger picture remains that inflation is causing the Bank of England a headache, especially coupled with no sign of an easing in the energy price surge. Given recent statements from Bank officials, it looks likely an interest rate hike will happen soon. However, we believe that he MPC will avoid tightening too aggressively as they will want to see the economic recovery continue in what remains a fragile economic landscape.”
