UK inflation falls unexpectedly to just 1.7%

UK inflation, as measured by the Consumer Price Index (CPI) fell unexpectedly to 1.7% in the year to September, the lowest rate in three-and-a-half years.

The latest figures from the Office for National Statistics (ONS) revealed the dramatic fall, meaning UK inflation is now below instead of above the Bank of England’s 2% target for the first time in years.  

Lower airfares and petrol prices were the main drivers behind the surprise slowdown, official figures showed.  

Core inflation also dipped to 3.2% from 3.6% in August, due in part to a slowdown in wages growth. Core inflation strips out more volatile items such as food or energy prices and is a key inflation rate that the Bank of England watches as it is a better indication for longer term trends.

Separately, September's CPI inflation figure is also normally used to set the increase for many benefits, which will take affect in April next year.

September's CPI inflation is part of the State Pension triple-lock calculation. The triple lock means that each year the State Pension increases by either wage growth, CPI or 2.5% - whichever is the highest, so pensions will be increased by the higher wage growth figure of 4.1%, worth more than £470 a year.

Universal Credit meanwhile is linked to CPI, locking in a 1.7% increase next April.

What is inflation and how is it measured?

Inflation is a measure of how the prices of goods and services have increased over time.  

Goods are tangible items sold to customers, such as food, while services are tasks performed for the benefit of recipients, such as a haircut. Generally, this increase is measured by considering the cost of things today compared to how much they cost a year ago. The average increase between these prices is demonstrated in the inflation rate.  

Rising interest rates directly affect the cost of living. For example, if the price of a bottle of milk is £1, and inflation is increasing by 5%, then your bottle of milk will cost you 5p more. Or, in other words, the spending power of your money has decreases by 5%. 

Ideally, the Government wants to keep inflation low and stable. The general mandated target for the Bank of England is 2%. Anything significantly above or below this target is thought to cause issues for the economy.  

The cost of living surged in recent years, with inflation peaking at 11% in 2022 - way above the Bank of England's 2% target, partly due to the increase in energy prices following Russia's invasion of Ukraine.

To try to slow price rises, the Bank increased rates to encourage people to spend less and bring inflation down.

While the rate has dropped, falling inflation does not mean the goods and services are coming down in price overall, it is just that they are rising at a slower pace.  

Typically, some prices fall whilst some rise – and those prices that are still rising may do so at a slower pace, therefore slowing the overall rising cost of living. For example, the price of Olive Oil increased by 33% over the last 12 months, but the price rise has been even higher over the last couple of years – at times rising by over 50%.  

On the flip side, air fare prices actually fell in the 12 months to September, by 5%.

What does this mean for interest rates?

The unexpected fall in the inflation rate will likely pave the way for further interest rate cuts.  

UK interest rates are currently at 5%. The Bank of England made its first cut in four years, in August but decided to hold them last month.

Now that the inflation figure is below the Bank of England’s 2% target, further interest rate cuts in the coming months are very likely, with a November rate cut almost being guaranteed and a December rate cut also looking likely following the recent figures. 

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The details in this article are for information only and do not constitute individual advice.