Inflation falls to lowest level in three years - what it means for your money
September's rate of inflation is used to decide how much benefits will rise by next April - and also affects state pensions
by Ruby Flanagan · ChronicleLiveInflation has once again dipped below the Bank of England's 2% target, hitting its lowest level in three years. The Consumer Price Index (CPI) level of inflation fell to 1.7% in the 12 months leading up to September, marking the lowest rate the UK has experienced since April 2021 when it stood at 1.5%.
Economists had anticipated a drop this month, with some predicting it could reach this level. Today's figure sees inflation fall back below the Bank of England's 2% target, potentially stoking calls for another rate cut when the Bank's Monetary Policy Committee (MPC) convenes next month on November 7.
It's crucial to note that this decrease in inflation doesn't signify falling prices, but rather a slower rate of increase. According to today's analysis, lower airfares and petrol prices contributed to the dip in inflation, although food prices saw an uptick.
Encouragingly, core inflation also dropped – albeit remaining higher than the headline CPI index. The Core CPI rate - which excludes energy, food, alcohol and tobacco - was 3.2% in the 12 months to September, down from 3.6% in August.
Goods prices fell at a faster pace, dropping to -1.4% last month from -0.9% in August, reports the Mirror.
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Inflation for services, which had risen over the summer partly due to the "Taylor Swift" effect and wage increases, has also decelerated from 5.6% to 4.9%. This slowdown across various sectors is fuelling speculation about a potential interest rate cut in November, with some market observers suggesting a reduction of 0.25 percentage points could be on the cards, and a further cut in December is not out of the question.
Amy Knight, personal finance expert at NerdWallet UK, commented: "The difference between a 0.25 and 0.5% drop could have a significant bearing on monthly repayments for new and existing mortgages. Borrowers who've found high rates particularly painful can look forward to having a portion of their income back, making family finances less stressful. First-time buyers could also find it easier to pass lenders' affordability checks, particularly if they've been diligent about maintaining their credit history."
However, she warned: "However, conflict in the Middle East has the potential to play havoc with energy prices, which could see UK inflation pick up pace, curbing the Bank's ability to bring rates down."
Grant Fitzner, ONS Chief Economist, said: "Inflation eased in September to its lowest annual rate in over three years. Lower airfares and petrol prices were the biggest drivers for this month's fall. Increases for food and non-alcoholic drinks partially offset these, 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."
Chief secretary to the Treasury, Darren Jones, commented on the slowing pace of price rises as "will be welcome news for millions of families" but acknowledged there's more work ahead. He said: "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."
The September inflation rate also holds significance as it determines benefit increases in April and affects state pensions.
Under the triple lock commitment, a confirmation is awaited on whether payments will rise by 4%. Chancellor Rachel Reeves, speaking in 2023, pledged that under Labour, benefits would be linked to September’s inflation figure, respecting the "tradition".
What inflation means for you:.
Inflation is the measure of how prices shift over time. For example, an item costing £1 last year, now priced at £1.03, has an inflation rate of 3% for that item.
While the main CPI figure represents an average, individual price changes can be above or below this. Monthly inflation data released by the ONS tracks prices using a varied "basket of goods" which is continuously reviewed.
How inflation ties in with interest rates:
Interest rates often respond to inflation trends; central banks may raise interest rates to curb high inflation, influencing borrowing costs, and thereby spending, across the economy.
In an attempt to curb inflation, the Bank of England initiated a rise in interest rates in 2021. The rationale behind this is that as interest rates increase, borrowing becomes more costly, which should theoretically lead to reduced spending, thereby lowering demand and prices.
As of December 2021, the base rate was a mere 0.1%, but it escalated to 5.25% by August 2023. It remained unchanged until August 2024 when it was reduced by 0.25 percentage points to 5%, where it has stayed ever since.
Inflation plays a significant role in determining the annual increase in the state pension and some government benefits. For benefits, they are set to rise each April based on September's inflation rate.
However, the state pension operates differently due to the Triple Lock promise.
The Triple Lock promise ensures that state pension payments increase by the highest of three figures: the Consumer Price Index (CPI) for September, the average wage growth between May and July, or 2.5%. Last month, it was confirmed that wage growth was at 4%, meaning state pension payments will increase by this amount next April rather than by inflation.
Typically, any changes to the state pension are announced in the Autumn Budget. However, Rachel Reeves confirmed this week that state pension payments would see an approximate increase of £450 next year.