(RTTNews) - UK annual inflation slowed more than expected in September to a five-year low. Also, inflation stood below the central bank’s 2% target for the fourth straight month.

Annual inflation slowed to 1.1% in September from 1.6% in August, the Office for National Statistics reported Tuesday. This was the lowest annual rate since September 2004. Economists had expected the annual rate to ease to 1.3%. Month-on-month, consumer prices remained flat, the lowest monthly change since records began in 1996. Core annual inflation that strips out energy, food, alcohol and tobacco stood at 1.7%, down from 1.8% in August.

The largest downward contribution to the change in the CPI annual rate came from housing and household services, the ONS said. There were also large downward contributions from food and non-alcoholic beverages as well as restaurants and hotels. On the other hand, the largest upward contribution came from transport and clothing and footwear.

Further, the agency said the retail price index, which is used for indexation of pension and state benefits, stood at 215.3 in September, up from 214.4 in August. From August, the retail price index was up 0.4%.

Retail prices dropped 1.4% in September from the same period of last year compared to a 1.3% fall in August. Consensus forecast was for a 1.5% fall. Excluding mortgage interest payments, retail prices were up 1.3%, slower than the 1.4% growth seen in the prior month.

Amid U.K.’s annual inflation data, the pound slumped to fresh multi-month lows against the currencies of the U.S., Europe and Switzerland in European deals on Tuesday.

Commenting on the data, Caroline Newhouse-Cohen, an economist at BNP Paribas, said inflation would bounce back again from October to the end of this year on rising energy prices. Inflation would, thus meet the central bank’s 2% target on a two-year horizon, although some downward risks still remain, the economist noted. Further, higher import prices could pass on consumer prices in the short term, while weak internal demand would hinder inflation in the longer term.

David Kern, Chief Economist at the British Chambers of Commerce, reiterated that it is important for the central bank to increase the quantitative easing programme to GBP 200 billion, and to consider special measures to stimulate lending. Elsewhere on Tuesday, the Quarterly Economic Survey survey results from the business lobby supported the view that the decline in the UK economic activity is coming to an end, though much of the rebound is from historic lows. The BCC said the economy is still frail, and a sustainable recovery cannot be guaranteed.

Overall results for the third quarter were encouraging. The survey found that confidence strengthened across the board in the third quarter. Domestic orders and sales also strengthened considerably, especially in manufacturing. However, they remain negative, making it difficult to argue that the UK has already emerged from recession. The cashflow indicator remained negative and still remain weak by historical standards.

“The most encouraging feature of these results is that confidence has strengthened dramatically in both manufacturing and services. In the face of huge challenges, British businesses are showing resilience,” said BCC Director General, David Frost.

Also on Tuesday, a survey by the Royal Institute of Chartered Surveyors showed that confidence returned to the UK housing market in September, with the net balance of respondents expecting house price to rise moving up to its highest level since May 2007. Separately, data released by the British Retail Consortium showed that comparable store sales increased 2.8% year-on-year in September, following a 0.1% decrease in August.

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