Inflation hits three-year low, but food inflation strengthens

British inflation fell by more than expected last month, including key measures watched by the Bank of England, according to data on Wednesday that bolstered bets on an interest rate cut next month.

The rate of annual consumer price inflation dropped to 1.7 per cent in September from 2.2 per cent in August, the lowest reading since April 2021, the Office for National Statistics said.

Sterling fell by half a cent against the US dollar immediately after the figures were published.

Core inflation, which excludes energy, food, alcohol and tobacco, dropped to 3.2 per cent from 3.6 per cent in August.

"Lower airfares and petrol prices were the biggest driver for this month's fall. These were partially offset by increases for food and non-alcoholic drinks, the first time that food price inflation has strengthened  since early last year," ONS chief economist Grant Fitzner said.

There were also signs of weaker inflation pressure ahead. Prices charged by factories for their goods fell by 0.7 per cent in the year to September, the biggest fall since October 2020, during the COVID pandemic.

The inflation rate was lower than the 1.9 per cent rise that analysts forecast and has cemented expectations that the central bank would likely cut interest rates again in November.

"It is absolutely amazing to see such a dramatic drop in the UK's CPI number, and the news had brought nothing (but) good things for the Bank of England," said Naeem Aslam, chief investment officer at Zaye Capital Markets.

In August, the BoE reduced it key rate for the first time since early 2020, from a 16-year high of 5.25 per cent as inflation returned to normal levels.

But it decided against a second reduction in a row in September.