The UK’s inflation rate fell unexpectedly to 1.7% in September 2024, the lowest in over three-and-a-half years. This decline was largely driven by lower airfares and falling petrol prices, as reported by the Office for National Statistics (ONS).
This figure places inflation below the Bank of England’s target of 2%, which could pave the way for further interest rate cuts, with markets expecting a cut in November and potentially another in December. Currently, interest rates stand at 5%, but further reductions are anticipated to support the slowing economy.
The inflation rate in September is significant as it usually sets the rate for benefit increases in the following April. Under the current system, disability benefits like personal independence payment (PIP), carer’s allowance, and attendance allowance must rise by at least September’s inflation rate, meaning a 1.7% increase next April. However, this rise would be notably lower than the expected 4.1% increase in state pensions, which follows the triple lock mechanism.
While inflation is easing overall, households have still faced price increases in areas such as food, with the costs of milk, cheese, eggs, soft drinks, and fruit rising. This marks a shift in food price inflation, which had been moderating since early last year.
This unexpected drop in inflation comes ahead of Chancellor Rachel Reeves’ first Budget on 30 October. Facing a £40bn gap, the Chancellor is planning tax increases and spending cuts, and has warned of difficult decisions on welfare, spending, and taxation.
Despite the falling inflation, energy bills are expected to rise by about 10% this month, meaning inflation could climb again later in the year. This volatile economic environment continues to challenge households, even as inflation slows.
Notwithstanding, this may be seen as good news for many ahead of the next Interest Rate meeting of the Bank of England on 7th November, where the chances of a larger than expected cut in interest rates by up to 0.5% or 0.25% cut in November followed by a further 0.25% in December, have increased.
The following day the European Central Bank (ECB), on the other hand, reduced its interest rate by 0.25% to 3.25%. The decision to lower borrowing costs comes as inflation dell to 1.7% in September in the eurozone, down from 2.2% in August.
The result marked the first time the total had fallen below the ECB’s 2% target for three years. The decline was due primarily to falling energy prices, although core inflation – excluding volatile energy and food prices – remained at 2.7%, down slightly from 2.8%. Services inflation is also a stubborn outlier, running at 3.9% year-on-year.
Despite this, the headline rate of inflation is expected to come in around 2% for the rest of 2024, although it may slightly overshoot the target – according to some economists.
“The latest developments strengthen our confidence that inflation will return to target in a timely manner,” Lagarde told a European Union parliamentary hearing in Brussels last month and that the ECB would “take that into account” in October’s monetary policy meeting.
(Source: BBC / EuroNews)