As reported on Scottish Business News, The UK’s inflation rate has unexpectedly decreased to 1.7% for the year ending in September, marking the lowest level in three and a half years. This decline positions the inflation rate below the Bank of England’s 2% target, potentially paving the way for further cuts in interest rates.
According to official figures, the primary factors contributing to this unexpected slowdown were lower costs for airfares and petrol. September’s inflation figure is typically used to determine the increase in many benefits the following April.
Currently, UK interest rates stand at 5%. The Bank of England made an initial cut in August but opted to maintain rates last month. Market speculation had already suggested another rate cut might occur in November. The lower-than-anticipated inflation rate has heightened expectations for this cut and might even lead to a reduction in December as well. Susannah Streeter from investment firm Hargreaves Lansdown remarked that this scenario is increasingly likely.
Danni Hewson, head of financial analysis at AJ Bell, noted that a 0.25 percentage point cut is “pretty much nailed on” for November, with expectations for a second cut in December having “increased significantly.” However, Yael Selfin, chief economist at KPMG UK, warned that although a rate drop is anticipated next month, inflation could rise again due to an approximately 10% increase in household energy bills this month.
The Bank’s base interest rate significantly influences the borrowing costs set by High Street banks and other lenders for loans and credit cards. While higher rates have resulted in increased mortgage payments, they have also provided better returns for savers. Increased mortgage repayments for landlords can lead to higher rents.
Over recent years, living costs have surged, with inflation peaking at 11% in 2022—far exceeding the Bank of England’s 2% target—partly due to rising energy prices following Russia’s invasion of Ukraine. To curb price increases, the Bank raised rates to encourage reduced spending and lower inflation.
Despite the drop in rates, falling inflation does not imply an overall decrease in prices; rather, it indicates a slower pace of price increases. The Office for National Statistics (ONS) stated that September’s unexpected fall in inflation was mainly driven by airfares and fuel prices. Petrol and diesel prices fell by 10.4% compared to September last year. Although airfare prices typically drop after summer, they decreased more than usual last month.
However, households faced a rise in food and non-alcoholic drink prices, with increases noted for milk, cheese, eggs, soft drinks, and fruit. This marks the first rise in food price inflation since March last year, according to the ONS.
Darren Jones, Chief Secretary to the Treasury, commented that the overall slowdown in price rises would be “welcome news for millions of families.” He added that the government remains “focused on restoring economic stability and delivering growth.”
This unexpected reduction in inflation comes ahead of this month’s Budget announcement. Chancellor Rachel Reeves is preparing tax increases and spending cuts amounting to £40 billion. As she finalises her first Budget on 30 October, Reeves has cautioned ministers about “difficult decisions regarding spending, welfare, and tax.” She is reportedly developing plans to secure £40 billion to prevent real-term cuts to government departments.
September’s inflation data typically determines how much many benefits will increase in April. This includes universal credit adjustments at the government’s discretion. All major disability benefits—personal independence payment, attendance allowance, and disability living allowance—as well as carer’s allowance are legally required to rise by at least September’s inflation rate.
The government has expressed a desire to reduce its annual disability and incapacity benefits bill.
A 1.7% rise for benefits would be less than April’s anticipated state pension increase of 4.1%, determined by the so-called triple lock mechanism.
Richard Carter, CEO of Lenvi:“Inflation unexpectedly falling to 1.7% in the year to September, the lowest rate in three-and-a-half years, represents a major milestone for the Bank of England and for consumers, who will have been put off making big purchases like cars or buying a house in recent months. Our latest data on borrowing habits found that four in five Brits were likely to switch their mortgage deal this year, compared to three in five in 2022. Many of our customers will likely be anticipating increased mortgage activity, as inflation cuts point towards interest rate reduction next month and consumer confidence is slowly restored in the house-buying market.
“Consumers, including those looking to get a foot on the property ladder, will now be looking to the Autumn Budget at the end of the month, where things like Capital Gains Tax, first-time buyers and the Lifetime ISA are rumoured to be addressed. Our 150+ lending customers are preparing for this, and are acting fast to update their rates to stay competitive and ensure they are equipped to manage an increasing demand for loans, alongside supporting potentially vulnerable customers. Lenders will need to prepare to scale, compliantly, and to do this it’s vital that they have the correct processes and quality systems in place.”
Commenting on national investment stagnation despite inflation falling below 2% for the first time in over three years, Douglas Grant, Group CEO of Manx Financial Group, said: “While the news of UK inflation dropping below the 2% target for the first time in over three years is encouraging, the broader national sentiment is one of sluggish frustration with investments stagnant and as if hands were being sat on. The anticipation surrounding the upcoming Autumn Statement is palpable, as many hope it will provide the necessary clarity and direction for businesses. Now is a critical time for UK businesses to reassess their lending strategies, enhancing both financial stability and resilience in preparation for potential economic and policy changes. Recent research from Manx Financial Group sheds light on the ongoing struggles faced by SMEs: nearly a third have had to pause or scale back operations due to financial constraints in recent years. While this is an improvement from the 40% in 2023, one in ten SMEs seeking external finance have been unable to secure it.
“SMEs are vital to our economy, driving job creation and innovation, yet persistent pressures, including geopolitical conflicts, a tightening labour market, and cost-of-living challenges, continue to threaten their growth. The new Government must use the Autumn Statement to foster an environment where SMEs can thrive, leveraging both traditional and alternative lenders. Imposing higher taxes or inadequate financial support risks undermining growth and economic recovery.”
