LONDON, NOV 15 - Inflation in Britain eased more than forecast to 5 percent in October, official data showed on Tuesday, lending support to Bank of England expectations that it has probably peaked and will fall sharply next year.
However, consumer price inflation of 5 percent remains more than double the Bank's 2 percent target, and Governor Mervyn King will have to write a letter explaining the overshoot to Chancellor George Osborne. That letter will be published at 10:30 a.m.
The figures will be welcome news for the Bank, which is expected to give a gloomy outlook for the economy in its quarterly growth and inflation forecasts on Wednesday. The Bank has come under fire as prices have remained above target, squeezing consumer spending.
It's good news and it should help to reinforce the Bank of England's conviction that inflation has peaked. I think that is correct, said Brian Hilliard of Societe Generale.
However, I think the emphasis tomorrow in the inflation report will be on the deepening gloom from the damage the euro zone crisis is doing to our economy and growth prospects, he added.
Lower inflation gives the Bank leeway to do more QE (quantitative easing).
The Bank announced last month that it was restarting QE with an additional 75 billion pounds to bolster an economy struggling for growth when the government is cutting public spending and its main trading partner in continental Europe is in crisis.
The Treasury gave the figures a guarded welcome.
Whilst price inflation eased slightly in October, the Government recognises that these are difficult times for households as prices continue to be affected by conditions in the global oil and gas markets, it said.
The Bank of England has forecast that inflation should fall rapidly over 2012, but in the meantime the Government is taking action to help consumers with current high costs, including cutting fuel duty and freezing council tax.
Consumer prices rose 0.1 percent last month, taking the annual inflation rate down to 5 percent from a three-year high of 5.2 percent in September, the Office for National Statistics said.
Analysts had expected an annual rate of 5.1 percent.
Tesco, Britain's biggest retailer, launched a price-cutting campaign last month to reverse a gradual drift lower in its market share, triggering responses from top rivals Asda , J Sainsbury and Wm Morrison.
The slowdown in inflation was driven by lower food, air transport and petrol inflation. On the month, food prices fell 0.9 percent -- their sharpest drop for the month of October since 1996.
Upward pressures on inflation came from utility prices, which rose at their fastest annual rate since February 2009. Clothing prices also rose.
The retail price inflation gauge, which includes more housing costs and is the benchmark for many wage deals, slowed to 5.4 percent on the year from 5.6 percent in September, versus a forecast reading of 5.5 percent.
Several Bank policymakers have warned of the possibility of another recession in Britain, brought ever closer by the debt crisis engulfing its main trading partner, the euro zone.
The economic weakness, the Bank expects, will also bring inflation down and help it fall sharply next year, when one-offs such as the VAT tax hike also drop out of the equation.