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Cheaper fuel and food prices led to the sharpest fall in inflation in 16 years last month, opening the way for the Bank of England to further reduce interest rates next month.
The Office for National Statistics said that consumer price inflation (CPI) dropped to a lower than expected 4.5% in October from 5.2% in September - the first fall since August 2007 and the biggest since April 1992. Inflation peaked at a 16-year high of 5.2% in September due to spiralling energy costs, which have now fallen sharply.
Two thirds of the slowdown in inflation came from petrol prices and airfares. The average price of petrol fell by 7.1p per litre between September and October this year, to stand at 104.5p, compared with a rise of 2.7p last year. The AA said yesterday that petrol prices had fallen another 11.5p a litre in the past month - a record drop - to an average of just 94.9p.
But the fall in inflation was also helped by plunging food prices, allaying fears earlier this year of rocketing prices amid global shortages of staples such as rice and wheat. An easing of demand and increased supply has caused the price of such basic foodstuffs as bread, potatoes and butter to fall. Supermarkets have also been reducing the price of meat, with pork and lamb falling. The price of beef fell 1.7% in October and bacon 1.5%. Non-alcoholic drinks also became cheaper as well as spirits, CDs and clothes.
The wider retail prices index (RPI) measure, which includes housing, fell to 4.7% last month, down from 5.5% the previous month - the biggest fall since 2003.
Such is the sharp fall in prices that the Bank of England's monetary policy committee now sees deflation as a potential problem rather than inflation. Yesterday Tim Besley, the committee's most hawkish member who consistently voted for rate rises earlier this year to counter the threat of rising prices, said inflation was likely to fall below target next year due to a rapid fall in commodity prices.
Howard Archer, economist at IHS Global Insight, said: "Inflation is poised to drop like a stone over the coming months due to sharply lower oil and commodity prices, waning food prices, very favourable base effects and rapidly diminishing underlying inflation as the economy contracts and unemployment rises at an increasing rate." Analysts believe the committee will continue to cut rates aggressively. It slashed rates to 3% this month.
James Knightley at ING said: "The Bank of England has plenty of scope to loosen monetary policy further and we look for rates to hit just 1% early next year." A weaker currency typically pushes up inflation by making imports dearer. The pound has fallen to its lowest level against a trade-weighted basket since 1996.
The Liberal Democrat shadow chancellor, Vince Cable said: "This is welcome news for the millions of Britons who have spent the last year not only battling the credit crunch but also facing ever-higher bills. These figures vindicate the Bank of England's decision to slash interest rates."
Jim O'Neill, chief economist at Goldman Sachs, told a Cass Business School conference yesterday that he was glad the British authorities had finally "woken up" to the scale of the problem facing the economy. But he added that, just as everyone had got too excited about inflation in the first half of this year, fears about deflation were also likely to prove wide of the mark.
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