Andrew Bailey: Inflation has fallen ‘faster than expected’

Andrew Bailey, Governor of the Bank of England, said inflation has fallen “faster than we expected” but still warned that more progress would be needed on services inflation.

Speaking at a meeting of Institute of International Finance in Washington, Bailey said central banks around the world were seeing a “good story” on inflation.

“Disinflation — and the UK is part of this — has actually taken place faster than we expected it to,” he said.

The latest figures showed that inflation in the UK fell below two per cent for the first time since April 2021 in September, having peaked at over 11 per cent two years earlier.

Bailey had previously suggested that the Bank might take a more “activist” approach to cutting interest rates if there continued to be progress on inflation.

However, he struck a more cautious note in Washington, pointing to the continued persistence of services inflation. “We’ve got a very unbalanced mix of inflation components and services inflation remains higher than is consistent with the target,” he said.

Services inflation is seen as a good gauge of domestic price pressures in the economy, because of the dominance of services in the economy.

Price growth in the services sector eased significantly in September, dropping to 4.9 per cent from 5.6 per cent previously. But this was largely driven by volatile movements, such as a 35 per cent monthly fall in airfares.

Speaking earlier in the week, Megan Greene, another member of the Monetary Policy Committee (MPC), said she was not putting too much weight on the fall because of the volatility.

Bailey said there were still “genuine question marks” about whether the UK economy had undergone “structural changes” which would keep inflation higher for longer, pointing to a continued need for caution.

“We’ve got to see services prices inflation come further down,” he added.

Markets expect the Bank of England to cut interest rates again in November, having reduced rates for the first time since the pandemic in August.