By Andy Bruce and William Schomberg
LONDON (Reuters) -British inflation cooled by more than expected in October as household energy prices dropped from a year ago while stubbornly high services sector price growth also eased, offering some relief to the Bank of England and Prime Minister Rishi Sunak.
Annual consumer price inflation plunged to a lower-than-expected 4.6% in October from 6.7% in September, official data showed on Wednesday. The increase in consumer prices was the smallest in two years.
The Bank of England's forecasts and the consensus from a Reuters poll of economists had pointed to a reading of 4.8%.
The ONS said the fall in the annual CPI rate was the biggest from one month to the next since April 1992.
Sterling fell slightly against the dollar after publication of the data, which showed key inflation measures watched closely by the BoE also falling by more than expected.
"The UK economy is still very much facing stagflation and, in our view, the road ahead will likely continue to be bumpy," Julien Lafargue, chief market strategist at Barclays Private Bank. "We would expect the Bank of England to keep interest rates unchanged for a few more months."
Core inflation, which strips out energy and food prices, fell to 5.7% from 6.1%, while service sector inflation also fell by more than the central bank had expected to 6.6% from 6.9%.
The data represented some rare welcome news for Sunak, who had promised to halve price growth this year before an expected 2024 election that opinion polls show his Conservative Party is likely to lose.
"In January, I made halving inflation this year my top priority. Today, we have delivered on that pledge," Sunak said on social media platform X.
Opposition lawmakers, and many economists, say the government blamed external factors for the rise in inflation, and then sought to take credit for the ensuing drop.
Despite the sharp fall in inflation last month, Britain retains the highest rate of consumer price growth among Group of Seven nations - narrowly above France's 4.5% - although Italy is due to publish its updated estimate for October later on Wednesday.
On Tuesday, U.S. inflation data also came in weaker than expected, sparking a rally in government bond prices and sending other major global currencies higher against the U.S. dollar, including the pound.
BoE Chief Economist Huw Pill said on Tuesday that the expected fall in inflation to just under 5% would still leave it "much too high" even if it represented a more than halving in price growth over the past year.
The BoE has sought to stress that it is nowhere near cutting interest rates from their 15-year high, even as the economy flat-lines close to a recession.
"The case against any further rate hikes is increasingly clear, but significantly more evidence will be required before rate cuts can start to be considered," said Hugh Gimber, global market strategist at J.P. Morgan Asset Management.
"The tightness of the labour market remains the key concern."
Investors added to their bets on BoE rate cuts next year with three 25-basis-point reductions in Bank Rate fully priced in by December 2024, and a first cut fully priced for June.
(Reporting by Andy Bruce and David Milliken, editing by William James and Bernadette Baum)