Inflation dropped below the Bank of England target rate last month for the first time since April 2021, according to new figures. The Office for National Statistics (ONS) said Consumer Prices Index (CPI) inflation fell to 1.7% in September, from 2.2% in August.
It was lower than expected, with analysts having predicted a reading of 1.9% for the month. The September figure is used by the Government to decide a number of tax and spending changes for next year, and means UK state benefits will rise by 1.7% next year.
It also confirms that state pensions will increase by 4.1% next April, due to the triple-lock policy. ONS chief economist Grant Fitzner said: “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.”
Darren Jones, Chief Secretary to the Treasury, said: “It will be welcome news for millions of families that inflation is below 2%. 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.”
Alice Haine, Personal Finance Analyst at Bestinvest by Evelyn Partners, said: “The lower inflation rate will be comforting for consumers who may be enjoying a little more financial flexibility now that incomes are less stretched than they have been over the past couple of years. Of course, prices are still rising, just at a significantly slower pace than at the height of the cost-of-living crisis in October 2022 when inflation hit a peak of 11.1%.
“While the latest inflation data appears positive for consumers, almost three years of rapid prices rises have left their mark on household budgets and many are still trying to balance the books as their finances slowly recover from the high borrowing and living costs seen at the height of the cost-of-living squeeze. They will now be looking to the BoE for action on rates, as a second quarter-point reduction in November would help to ease borrowing costs further for those with mortgages and debts.
“While inflation is below the BoE’s target of 2% for now, it is expected to tick upwards in the final months of the year when the 10% increase in the Ofgem Energy Price Cap on the previous quarter that kicked in on October 1 is reflected in the figures. However, the rate-setting Monetary Policy Committee is likely to consider other data points aside from the headline inflation rate when they deliver their next interest rate decision on November 7. These include the cooling jobs market, with wage growth and vacancy levels both continuing to ease, along with slowing economic growth figures in recent months compared to the first half of the year.
“For homeowners and first-time buyers, lower inflation combined with slightly more competitive mortgage rates and product choice means affordability levels are improving for buyers shopping around for a new home or those refinancing their existing mortgage as their money can stretch that little bit further.
“Average mortgage rates for two- and –five-year fixed-rate deals dropped to their lowest level since May 2023 between the start of September and the start of October. While there has been some volatility since then, with some lenders increasing rates amid concerns about Labour’s ‘painful’ Budget and the effect geopolitical tensions in the Middle East might have on oil prices, the general outlook for mortgage rates remains positive.
“A second interest rate reduction in November could energise the mortgage market even further with rates falling at an even faster pace. For now, the big challenge for new buyers and those refinancing is whether to opt for a fixed or variable deal, which is why it is wise to seek the services of an independent mortgage broker who can advise on the best options for each individual situation.
“Even if a second interest rate cut does materialise in November, something that particularly benefits first-time buyers, the 1.4 million borrowers emerging from a fixed-rate mortgage in the next 12 months are still facing an average jump in their monthly repayments of £150.
“The latest inflation data confirms that pensioners are in line for a bumper boost to their annual state pension payment next April of around £475, taking the total for the full new state pension to approximately £11,975.”