UK inflation could fall below 2%, Citi forecasts

theguardian.com:

Britain’s inflation rate could fall to below 2% by the end of the year, according to new financial industry forecasts, handing the chancellor a boost to the public finances before a general election in 2024.

Predictions that falling gas prices will accelerate the decline this year in the consumer prices index (CPI) fromlast month’s level of 10.1% could also support a recovery in household living standards and persuade the Bank of England to cut interest rates earlier than expected.

Investment bank Citi said the CPI was likely to fall to 2.3% in November, below the Bank of England’s estimate of a 4% inflation rate the fourth quarter of the year. Fund manager Investec said it could slide to 1.6% by December.

Inflation has remained in double digits since last July – barring a brief drop to 9.9% in August – triggering a wave of pay demands to compensate workers for the loss of spending power.

Most of the increase was due to rising energy and food prices, which Citi’s chief UK economist, Benjamin Nabarro, said were now falling at a faster rate than had been expected at the beginning of the year.

Interest rate rises by the Bank of England are also expected to have a dampening effect on consumer spending, further reducing the pressure on prices.

A slide in inflation to 2% would allow the prime minister to more than fulfil his pledge to halve inflation by the end of the year and make it easier to resolve a wave of public sector strikes over pay.

“The faster reduction in inflation [this year] primarily reflects an easing in pricing pressures, particularly in energy,” Nabarro said, adding that inflation could be as low as 5% by July.

Philip Shaw, chief UK economist at Investec, has forecast a fall in inflation to 1.6% by the fourth