Inflation falls as petrol prices ease

Britain's inflation rate fell for the first time in over a year as fuel prices eased back from record highs, official figures showed today.

In news that will come as a relief to the Bank of England, the Office for National Statistics (ONS) said the consumer prices index (CPI) had risen just 0.1% in October.

That brought the annual rate down to 2.3% from 2.5% in September, the highest figure since records began in 1997. Economists had expected only a slight easing, to 2.4%.

The largest downward effect came from fuels and lubricants as petrol pump prices fell from record highs in September.

Average recorded prices of ultra low sulphur petrol fell 1.3p a litre in October compared with an increase of 1.8p a year ago.

Another large downward contribution came from the financial services sector, with bank overdraft charges increasing by less than a year ago.

There were no large upward pressures, though there were small effects from leisure and tobacco, the price of a packet of 20 cigarettes having risen by an average of around 3p.

While inflation remained above the Bank of England's 2% target, the signs that prices have come off the boil reinforced expectations that interest rates will come down soon.

"We believe the door is opening for an interest rate cut early in 2006 if the economy fails to show sustained, significant signs of improvement over the next couple of months," said Howard Archer of Global Insight.

Annual growth in the retail price index (RPI), on which most pay deals are based, fell sharply to 2.5%, its lowest level since April 2004, from 2.7% in September.

That was below the expected 2.6%, and should ease concerns that higher inflation in recent months could prompt bigger wage demands. The fall in RPI was driven mainly by housing depreciation as property prices increased more slowly than a year ago.

The figures come ahead of tomorrow's key quarterly inflation report, in which the Bank will outline its forecasts for inflation over the coming months.

In its August report the Bank predicted that CPI inflation would rise above the 2% target in the short term. Inflation is then expected to ease off before once again breaching this level at the end of the two-year forecast period.