Inflation in the UK has dropped to its lowest level in more than three years, providing a timely boost to Chancellor Rachel Reeves ahead of the upcoming budget.
The latest figures from the Office for National Statistics reveal a sharp fall in the consumer prices index (CPI) to 1.7% in September, down from 2.2% in August. This decline, steeper than financial markets had anticipated, was driven by lower airfares and a drop in petrol prices.
For the first time since April 2021, inflation has dipped below the Bank of England’s 2% target. This development is positive news for Reeves as she prepares to deliver Labour’s first budget since 2010, set to focus on protecting household incomes, repairing public services, and investing in infrastructure to bolster the economy. The chancellor has emphasised that low and stable inflation is key to achieving these goals.
The fall in inflation comes at a crucial time, with growing expectations that the Bank of England will cut interest rates. Economists predict the central bank will reduce rates by a quarter of a percentage point to 4.75% in November, particularly after recent figures indicated a slowdown in the jobs market.
The pound has weakened against both the US dollar and the euro, while UK government borrowing costs have fallen in anticipation of a potential rate cut. Darren Jones, Chief Secretary to the Treasury, welcomed the news, stating: “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.”
The inflation drop was supported by falling petrol and diesel prices, driven by lower crude oil costs. However, this was partially offset by rising prices in food and non-alcoholic drinks. Despite the positive headline figure, some investors warned that the decline may be short-lived. The rise in Ofgem’s energy price cap at the start of October could push inflation back up in the coming months, with some forecasts suggesting it may return to 2.2%.
Suren Thiru, Economics Director at the Institute of Chartered Accountants in England and Wales, said: “Though the stars are aligning for a November rate cut, the upcoming budget is the final hurdle as rate setters will want to assess the inflationary impact of any measures announced before loosening policy again.”
While the fall in inflation is positive for government borrowing costs, it could have a mixed impact on households. The lower-than-expected figure for September will be used by the government to set annual increases in benefits, meaning millions of households could lose out next year. However, the state pension is set to rise twice as fast, thanks to Labour’s commitment to the “triple lock,” which guarantees a rise based on inflation, earnings growth, or 2.5%, whichever is highest.
Economic experts have also noted the impact on household finances. The Resolution Foundation described the temporary fall in inflation as “badly timed” for millions of families, estimating they could lose about £74 next spring compared to using the August inflation figure or the projected October figure of 2.2%. Nevertheless, the government is expected to save £500 million on its welfare bill, although this benefit may be short-lived.
Despite the benefits of lower inflation and borrowing costs, concerns remain about the UK’s economic growth. Rachel Reeves has warned that Labour faces a £22 billion shortfall in the public finances inherited from the previous Conservative government. Reports suggest the chancellor is considering tax rises and spending cuts worth £40 billion in the upcoming budget to balance the books.
Pressure is mounting on Reeves to improve living standards and restore public services. Paul Nowak, General Secretary of the Trades Union Congress (TUC), said: “Households are still hurting, and families need a fresh start. With CPI now below target and GDP growth at just 1% for the last 12 months, this month’s budget is an urgently needed opportunity to unleash a new era of growth to help us repair and rebuild our economy and our country.”
As the nation awaits the details of Labour’s first budget in over a decade, the chancellor faces a delicate balancing act between fiscal responsibility and delivering on promises to improve the economy and support struggling households.
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