Inflation falls to five-year low and 'pushes back anticipated interest rate rise'

The threat of a New Year increase in interest rates rapidly receded today as inflation dropped to its lowest level since 2009.

Supermarket price wars and falling air fares contributed to a bigger than expected drop in the Consumer Prices Index — the headline measure of the cost of living — from 1.5 per cent to 1.2  per cent in September.

The fall sent City economists scurrying to rewrite their estimates of when the Bank of England will increase the cost of borrowing, which has not risen for seven years.

Alex Edwards, head of the corporate desk at online currency dealer UKForex, said: “Prior to today’s release, a rate hike was priced in for June/July. After this headline number, investors might start pushing these expectations out even further.”

Scott Corfe, Head of Macroeconomics at City forecasters the Centre for Economics and Business Research, said: “What looked like a February 2015 rate rise a few months back is increasingly looking like a November 2015 rate rise.”

Inflation is now close to its all-time low of 1.1 per cent in October 2009 — in the depths of the recession triggered by the banking crisis.

A battle for customers between the “big four” supermarket giants and discounters Aldi and Lidl helped push food prices down by 1.4 per cent last month. Morrisons introduced a “Match and more” offensive in an attempt to counter the new competition.

Grocery prices have not fallen this fast since the 2.2 per cent recorded in June 2002.