Britain's high inflation rate unexpectedly fell in August, prompting investors to increase their bets on the Bank of England pausing its historic run of interest rates hikes as soon as tomorrow.
Official data published today showed the consumer price index dropped to 6.7%.
This marked its lowest since February 2022, and was down from July's 6.8%, confounding forecasts by economists polled by Reuters - and the Bank of England - for an increase.
Investors put a nearly 50-50 chance on the Bank of England keeping rates on hold tomorrow after 14 back-to-back increases stretching back to December 2021.
The Office for National Statistics said the fall was driven by a drop in hotel prices and air fares, which are often volatile, and by food prices rising by less than at the same time last year.
That offset a jump in fuel prices and an increase in a tax on alcoholic drinks.
The Bank of England said last month that it expected inflation in August would rise to 7.1% before falling sharply to around 5% in October which would still be more than double its 2% target.
Investors had been overwhelmingly expecting the bank to raise interest rates for the 15th time in a row tomorrow, taking Bank Rate to 5.5% from 5.25%.
That looked much less certain in light of the inflation data.
Investors were this morning putting a roughly 47% chance on the Bank of England pausing its run of rate hikes tomorrow, up from about 20% before the inflation figures were published.
Some economists said the data might not cause the British central bank to change course, however.
"The inflation figures may not sway the Bank of England away from raising interest rates tomorrow," Yael Selfin, chief economist at KPMG UK, said.
"There are renewed concerns about the price of oil, which has risen by over 25% since June, and potential pressures on global food prices. These could not only slow the disinflation process further but also reverse the decline in inflation expectations, causing further worry for the Bank of England," the economist added.
Britain's inflation rate remains high - topped only by Austria and Iceland among Western European countries in August.
But core inflation - which strips out volatile food and energy prices - fell by more than the headline rate to 6.2% from 6.9% in July. The Reuters poll had pointed to a reading of 6.8% in August.
Price growth in Britain's service sector, which is also being closed watched by the Bank of England, also lost some of its steam as it slowed to 6.8% from 7.4% in July.
As well as providing some relief to the Bank of England, which has come under criticism after inflation surpassed 11% last October, the latest figures were welcomed by the government of Prime Minister Rishi Sunak.
He has promised to halve inflation this year before an election expected in 2024.
"Today's news shows the plan to deal with inflation is working - plain and simple," UK finance minister Jeremy Hunt said.
"But it is still too high which is why it is all the more important to stick to our plan to halve it so we can ease the pressure on families and businesses. It is also the only path to sustainably higher growth," he said.
The minister said Britain could not afford to go on a "borrowing binge" in an apparent swipe at the opposition Labour Party which is riding high in opinion polls.
