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(Bloomberg) — UK inflation tumbled to the lowest level in two years, prompting investors to firm up bets that the Bank of England will be able to cut rates as early as the Spring of next year.

Consumer prices rose 4.6% from a year earlier in October, down sharply from 6.7% in September and the slowest pace since 2021, the Office for National Statistics said Wednesday. The figures allowed Prime Minister Rishi Sunak to declare victory in his goal of cutting inflation in half in 2023.

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“While it is welcome news that prices are no longer rising as quickly, we know many people are continuing to struggle,” Sunak said in a statement. “We must stay the course to continue to get inflation all the way back down to 2%.”

The drop was even sharper than the 4.7% reading economists had anticipated. It will strengthen expectations that the Bank of England is finished raising interest rates and refocus attention on a sharp slowdown in the economy. The pound slipped after the report, trading as much as 0.2% weaker at $1.2469.

There is similar speculation in the US, where traders on Tuesday erased bets on more rates hikes by the Federal Reserve after figures showing that inflation broadly slowed. After a record tightening spree, the European Central Bank has also probably reached peak rates as price pressures subside.

“Today’s data are unlikely to shift the dial for the Bank of England, with interest rates expected to remain at their current level until the second half of next year,” said Yael Selfin, chief economist at KPMG UK. “While the drop in inflation will be welcomed by households, it is not in itself a signal of sustained inflationary easing but rather reflects the lagged impact of the fall in wholesale gas prices feeding through to energy bills.”

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Sunak made slashing inflation a priority in the wake of a 10.7% increase in prices in the final quarter of last year. It remains a little more than double the Bank of England’s 2% target.

This month’s reading marked the biggest drop since 1992, when inflation plunged from 7.1% to 4.7% as a boost to prices a year earlier fell out of the annual comparison. The surge in prices stemmed from then-Chancellor of the Exchequer Norman Lamont’s 1991 budget, which included an increase in VAT and numerous duties.

In the UK, both core and services inflation — which are being closely watched by the BOE for signs of underlying inflation — came in weaker than economists had expected. Core inflation, which strips out volatile energy and food prices, slowed to 5.7% from 6.1%. There was no increase in consumer prices between September and October.

“Food prices were little changed on the month, after rising this time last year, while hotel prices fell, both helping to push inflation to its lowest rate for two years” ONS Chief Economist Grant Fitzner said. “The cost of goods leaving factories rose on the month. However, the annual growth was slightly negative, led by petroleum and basic metal products.”

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The cost of electricity, natural gas and other domestic fuels fell 7% in October compared with a 24.7% surge a year earlier. Food price inflation slowed to 10.1% from 12.3%., with prices gaining just 0.1% on a month.

The ONS also said that price increases in food and non-alcoholic drinks was one of the largest downward drags on inflation.

The annual rate of inflation for housing and household services, which includes energy bills, was the lowest since 1950, the ONS said.

What Bloomberg Economics Says …

“Progress is slow and suggests the remaining distance to the 2% target will be a grind – we think it will take at least another year. As a result, interest rate cuts look unlikely until the second half of 2024.”

—Dan Hanson and Ana Andrade, Bloomberg Economics. Click for the REACT.

A narrow majority on the BOE have voted to keep interest rates steady at 5.25% in the last two meetings, with speculation building in financial markets about when it will pivot toward cuts. 

Currently, traders expect the first reduction in June next year. Despite a darkening economic outlook, officials including BOE Governor Andrew Bailey and Chief Economist Huw Pill have made clear that rates are likely to stay restrictive to an extended period.

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A return to the 2% target is unlikely until 2025, economists and the central bank forecast.

The strength of the labor market is still a major concern for policymakers after data on Tuesday suggested it is holding up in the face of a flatlining economy. Wage growth is running at close to a record pace and unemployment is still low at 4.2%.

Pipeline price pressures continued to ease. Producer input costs slipped 2.6% from a year earlier, and output prices – the cost of goods leaving factory gates – fell 0.6%, which matched the largest drop in three years.

—With assistance from Eamon Akil Farhat, Mark Evans, Joel Rinneby and Constantine Courcoulas.

(Updates with comment, market reaction and producer prices.)

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