- UK CPI falls to 1.7% in Sept from 2.2%
- Sterling slumps as investors bet more on BoE rate cuts
- Core, services measures also come in below forecasts
- Data offers modest help for UK's Reeves ahead of budget
Oct 16 (Reuters) - British inflation dropped sharply and key price gauges watched by the Bank of England also fell, bolstering bets on an interest rate cut next month and helping finance minister Rachel Reeves before her first budget.
The rate of annual consumer price inflation dropped to 1.7% in September from 2.2% in August, the lowest reading since April 2021 and driven down by lower airfares and petrol prices, the Office for National Statistics said.
A Reuters poll of economists had pointed to a reading of 1.9%.
Sterling fell by four-fifths of a cent against the U.S. dollar and fell sharply against the euro too after the figures were published.
Interest rate futures showed investors were putting a 90% chance on two BoE quarter-point rate cuts by the end of this year, up from a roughly 80% chance on Tuesday.
Yael Selfin, KPMG UK's chief economist, said inflation was likely to rebound due to Middle East conflict-driven oil price increases and domestic energy price hikes. However, she added that this would not prevent the BoE from cutting interest rates.
"(Greater) labour market slack and continued progress on underlying inflation should provide room for the (BoE) to ease monetary policy further," Selfin said.
Britain's finance ministry welcomed the fall in inflation, which offers a helpful backdrop for Reeves as she readies her first budget, due on Oct. 30.
A less inflationary outlook would slightly improve the economic and fiscal outlook for the budget as Reeves struggles to find the extra money to invest in public services and new infrastructure without spooking investors.
Her spending plans will be watched closely by the BoE.
"Though the stars are aligning  for a November rate cut, the upcoming Budget is the final hurdle as rate setters will want to assess the inflationary impact of any measures announced before loosening policy again," Suren Thiru, economics director at ICAEW, an accountancy body, said.
Core inflation, which excludes energy, food, alcohol and tobacco, dropped to 3.2% from 3.6% in August.
Services inflation - which the BoE views as the most important gauge of domestically-generated price pressure - sank to its lowest since May 2022 at 4.9% in September, down from 5.6% in August.
The BoE had not expected services inflation to fall below 5% this year in forecasts it published in August, and the reading was below all expectations in the Reuters poll.
There were also signs of weaker inflation pressure ahead. Prices charged by factories for their goods fell by 0.7% in the year to September, the biggest fall since October 2020, during the COVID pandemic.
Reporting by Andy Bruce, graphic by Sumanta Sen Editing by William Schomberg and Andrew Heavens
Source: Reuters