The Bank of England's key price indicators and British inflation both fell precipitously, supporting betting on an interest rate decrease next month and assisting Finance Minister Rachel Reeves ahead of her first budget.

According to the Office for National Statistics, decreased ticket and gasoline costs caused the annual consumer price inflation rate to fall from 2.2% in August to 1.7% in September, the lowest level since April 2021.

Following the release of the numbers, sterling plummeted four-fifths of a cent against the US dollar and also plunged precipitously versus the euro. Investors were placing a 90% chance on two BoE quarter-point rate cuts by the end of this year, according to interest rate futures, up from about 80% on Tuesday.

Yael Selfin, chief economist at KPMG UK, predicted that rising domestic energy prices and oil prices prompted by the Middle East crisis will cause inflation to recover. She did emphasize, though, that this would not stop the BoE from lowering interest rates. The decline in inflation was hailed by Britain's finance ministry, providing Reeves with a useful backdrop as she prepares her first budget, which is due on October 30.

Given that Reeves is having difficulty finding the additional funds to spend on new infrastructure and public services without alarming investors, a less inflationary prognosis would marginally improve the budget's economic and fiscal prospects. Core inflation, which does not include food, energy, alcohol, or tobacco, decreased from 3.6% in August to 3.2%.

The BoE considers service inflation to be the most significant indicator of domestically driven price pressure, and it fell to 4.9% in September from 5.6% in August, the lowest level since May 2022. In its August estimates, the BoE had not anticipated that service inflation would drop below 5% this year, and the data fell short of all expectations. Additionally, indications of lessening inflation pressure were present. In the year ending in September, factory prices dropped by 0.7%, the most since the COVID-19 epidemic in October 2020.