UK inflation unexpectedly dropped to 1.7% in the year leading up to September, marking the lowest rate in three and a half years. This decline brings the annual inflation rate below the Bank of England’s 2% target, raising the possibility of further interest rate cuts in the coming months.
Official figures released on Wednesday attributed the surprising slowdown in inflation primarily to lower airfares and reduced petrol prices. This development is significant, as the inflation figure for September is typically used to determine benefit increases set to take effect in April of the following year.
Currently, UK interest rates stand at 5%. The Bank of England had initiated its first rate cut in August but opted to maintain rates in September. However, market analysts widely expect a cut in November, and the latest inflation data could also pave the way for another reduction in December. Susannah Streeter from investment firm Hargreaves Lansdown stated that the recent inflation figures “open the door for a December cut too.”
Danni Hewson, head of financial analysis at AJ Bell, asserted that a 0.25 percentage point cut in November is “pretty much nailed on,” with rising expectations for a subsequent cut in December. Yet, KPMG UK’s chief economist, Yael Selfin, cautioned that while a rate reduction is likely next month, inflation could rebound due to an expected 10% increase in household energy bills.
The Bank’s base interest rate significantly influences borrowing costs for consumers, affecting loans, mortgages, and credit cards. The current high rates have resulted in increased borrowing costs for individuals, while savers have benefitted from higher returns. Additionally, increased mortgage repayments for landlords have contributed to higher rents.
Despite the decline in inflation, it is essential to note that this does not equate to falling prices for goods and services; rather, it indicates a slower rate of increase. For many families, like Maria, a helper at a community food pantry in Liverpool, the cost of living remains a pressing concern. Maria, who relies on the pantry to supplement her family’s groceries, stated, “I’ve got to prioritise food and heating.” She remarked on rising prices at supermarkets, expressing frustration at the challenge of making ends meet.
The unexpected drop in inflation from 2.2% in August to 1.7% in September was largely driven by decreased airfares and fuel costs. Petrol and diesel prices fell by 10.4% compared to the same month last year, while airfare prices also experienced a more significant decline than usual following the summer travel season. However, food and non-alcoholic drink prices have risen, marking the first increase in food price inflation since March last year.
Chief Secretary to the Treasury Darren Jones described the overall slowdown in price rises as “welcome news for millions of families,” emphasizing the government’s commitment to restoring economic stability.
This inflation drop comes ahead of this month’s Budget, where Chancellor Rachel Reeves is expected to implement tax increases and spending cuts amounting to £40 billion. As the government navigates these economic challenges, September’s inflation data will play a critical role in shaping benefit increases scheduled for April, including universal credit and various disability benefits, which are mandated to rise by at least the inflation rate.
