UK consumer price inflation fell from 2.7% in September to 2.2% in October, below a forecast here of 2.4% (see chart in previous post). The undershoot of 0.2 percentage points reflected a smaller-than-expected rise in student tuition fees in 2013-14, following the raising of the cap on English undergraduate costs in 2012-13.

The focus here is on “core” inflation, i.e. excluding energy and unprocessed food and adjusted for the impact of VAT changes and the increase in the tuition fee cap. As expected, this moved down to a new low of 1.8% in October. A post in August argued that recent weakness stems from a slowdown in money growth in 2010-11. Allowing for a typical two-year lead from monetary changes to prices, core inflation is likely to be at or close to a bottom and should trend higher during 2014 in lagged response to money supply acceleration over 2011-13 – see first chart.

The forecast for headline inflation has been adjusted to take account of recent softer petrol prices and the likelihood of government action to cap future increases in household gas and electricity bills. CPI inflation is projected to fluctuate around the current level over the winter before embarking on a core-driven upward trend next spring, reaching more than 3% in late 2014 – second chart.

Recent business surveys support the view that core pressures are building – the output prices balance of the PMI services survey, for example, reached its highest level since May 2011 last month.