UK inflation has declined to its lowest rate in more than three years, according to official figures released this morning.
The Office for National Statistics (ONS) just announced that inflation – the rate prices rise at over a set period – had dropped to 1.7%.
The news which will be welcomed by consumers across the country after a long period of accelerating prices which caused a cost of living crisis.
Here’s what you need to know about the announcement, and what it could mean for other parts of the economy.
What’s happened to the inflation rate?
The inflation rate has dropped in the 12 months to September, with the consumer prices index (CPI) falling from 2.2% in August to 1.7% last month.
This is the lowest rate seen in the UK since the cost of living crisis began to take hold in April 2021, when inflation was 1.5%.
Economists had expected inflation to drop to 1.9%, meaning these stats today come as a pleasant surprise.
And, according to the ONS, most of the decline comes from the transport sector, although food and non-alcohol drinks counteracted that positive impact by increasing significantly in price.
ONS’s chief economic Grant Fitzner explained: “Inflation eased in September to its lowest annual rate in over three years. Lower airfares and petrol prices were the biggest driver for this month’s fall.
“These were partially offset by increases for food and non-alcoholic drinks, the first time that food price inflation has strengthened since early last year.
“Meanwhile, the cost of raw materials for businesses fell again, driven by lower crude oil prices.”
Will inflation rates stay this low?
No, according to economic predictions.
Inflation is expected to increase again when October’s stats come in and account for an increase in energy costs.
“Looking further ahead, we think September will be the low point for CPI inflation,” analysts at Pantheon Macroeconomics told Sky News.
“Oil price rises mean energy costs will rebound, while we expect the chancellor to boost duties in the October budget.
“CPI services inflation should keep gradually slowing but that still leaves us expecting CPI inflation to rise to 2.8% in December, and 3% next September.”
What does that mean for interest rates?
It means the Bank of England is more likely to reduce the base interest rate – which generally sets the overall cost of borrowing – when it next meets on November 7.
Analysts are expecting the Bank to bring the interest rate down to 4.75% from its current 5%.
The Bank has only recently started to bring the interest rate down, having kept it at 5.25% between August 2023 and July 2024 in an attempt to bring inflation under control.
The Bank of England uses interest rates to keep inflation at their target of 2%.
That’s generally seen as enough to keep the economy growing without pricing the public out of their daily essentials.
Paul Noble, CEO of Chetwood Bank, said: “If the base rate is cut next month, this will likely result in greater confidence and activity across the property market, with a reduced cost of borrowing increasing demand from prospective buyers.”
Lily Megson, policy director at My Pension Expert, said: “Dropping to below target levels is a huge milestone in the fight against inflation, particularly after the sustained period of financial strain people have endured. Millions have seen savings like pension pots throttled by years of rising costs.
“Getting inflation under control has always been the priority in allowing savers to recover from the damage caused by prolonged price hikes.”
What does this have to do with Rachel Reeves’ Budget?
The chancellor will unveil her financial plans for the next year on October 30.
Reeves is expected to consult the Bank of England on her decisions for the country (unlike Liz Truss and her 2022 mini-Budget).
The chancellor will not be inclined to announce anything which could end up being inflationary, especially as prices are expected to go up again over the winter.
In fact, despite the positive inflationary news, she may be looking to increase taxes.
Director of the IFS Paul Johnson said: “The first Budget of this new administration could be the most consequential since at least 2010.
“The new chancellor is committed to increasing investment spending, and to funding public services.
“To do so, she will need to increase taxes, or borrowing, or both. Taxes are at an all-time high, and she is tightly constrained by her pledges not to raise the main rates of income tax or corporation tax, or to increase National Insurance or VAT at all. ”
He said her promise to balance the budget amid the £22bn black hole the Tories allegedly left behind in the government finances, especially amid rising health and pension spending, will add another layer of difficulty to the Budget.
Responding to the inflation update, chief secretary to the Treasury Darren Jones said the decline will be “welcome news for millions of families”.
He added: “However there is still more to do to protect working people, which is why we are focused on bringing back growth and restoring economic stability to deliver on the promise of change.”
Laura Trott, shadow chief secretary to the Treasury, said: “Today’s figures show Labour inherited a strong economy, thanks to the difficult decisions we took to tackle inflation when it was at its peak.”
The Liberal Democrat’s treasury spokesperson, Daisy Cooper, said: “The fall in inflation is welcome but we can’t fool ourselves that this winter won’t be difficult for the most vulnerable.
“The price of a weekly shop is still sky high, energy prices have risen once again and people are still feeling the effects of the spike in mortgage rates.
“The government must urgently look at ways to support the most vulnerable this winter and that should start by reversing their decision to cut Winter Fuel Payments for millions of worried pensioners.”