UK inflation softening to a three-year low should allow Bank of England governor Andrew Bailey and his monetary policy committee colleagues to be more aggressive with interest rate cuts.
The consumer price index fell to an annual rate of 1.7% in September, with core CPI easing to 3.2% and the BoE's closely watched services CPI dropping to 4.9%.
Following the report from the Office for National Statistics, financial markets moved to anticipate two interest rate cuts from the MPC by the end of the year, with money markets moving to put a 76% chance of this, up from roughly a 50% chance a few days ago.
Many economists were of a similar opinion.
“These weren’t particularly weak inflation numbers, but they were lower than expected. That will come as a pleasant surprise to the BoE," said Guy Foster, chief strategist at RBC Brewin Dolphin.
On top of the lower wage growth data yesterday Foster felt the MPC would be more likely to increase the cadence of interest rate cuts, rather than go for a larger 0.5% cut like the US Federal Reserve did last month.
Weaker air fares and petrol prices were a big driver of the decline, but Foster said that recent months have shown "a broader story of weak inflation in these numbers which should encourage the Bank to cut interest rates".
Economist Rob Wood at Pantheon Macroeconomics noted that the falls in motor fuels and a 34.7% month-to-month fall in airfares - the largest September fall since at least 2001, are both likely to reverse in October.
"So the downside news is smaller than it looks," Wood said.
But as services inflation came in weaker than the MPC assumed "will leave Governor Bailey chomping at the bit to enact 'aggressive' rate cuts, which we interpret as reductions at consecutive policy meetings".
This would mean the Bank would cut interest rates by 25 basis points at the 7 November meeting and another 25bps on 19 December.
As much of the easing of inflation was due to airfares and petrol, Paul Dales at Capital Economics felt the MPC "won’t consider a sign that domestic price pressures are becoming less persistent".
Although there is a rebound in CPI inflation expected for October and into the year end, inflation might remain close to the BoE's 2.0% target in the coming months, Dales said.
However, while a cut from 5.00% to 4.75% at November’s policy meeting is pretty nailed on, even before today’s release, Dales said the chances of that being immediately followed by another cut of the same size at the following meeting in December "has just gone up" but he feels the Bank will keep rates on hold at that meeting.
Barclays' Jack Meaning said the inflation data "adds to our conviction that the BOE will move to sequential 25bp cuts from November", suggesting a December cut and more in the new year, while Deutsche Bank's Sanjay Raja said "the case for sequential rate cuts is rising".
That said, Raja added that the autumn Budget looming on 30 October is "likely to be expansionary despite the scale of fiscal consolidation" and the MPC "will want to weigh the full effects of fiscal policy, which can tone down the case for more ‘forceful’ rate cuts in the near-term".