In a surprising development, the UK’s annual inflation rate fell to 1.7% in September, its lowest level in three-and-a-half years, according to official data from the Office for National Statistics (ONS).
This unexpected decline brings inflation below the Bank of England’s (BoE) 2% target, significantly increasing the likelihood of further interest rate cuts in the coming months.
The inflation drop was mainly driven by falling petrol prices and airfares, with fuel prices down by 10.4% compared to the previous year, and airline ticket prices decreasing more than usual following the summer season. However, some categories, including food and non-alcoholic beverages, saw an uptick, with higher costs for products such as milk, cheese, and fruit.
The September inflation figure plays a crucial role in setting the annual increase in many government benefits, including Universal Credit, which will rise in April based on this data. While the 1.7% inflation rate will influence benefits, state pensions are expected to rise by 4.1%, due to the “triple lock” policy that ties pension increases to the highest of three indicators: inflation, wage growth, or 2.5%.
The Bank of England’s base interest rate, currently at 5%, has been under scrutiny as inflation continues to cool. A 0.25% cut in November is now seen as highly likely, with analysts suggesting the lower-than-expected inflation could even trigger another rate reduction in December. Susannah Streeter, an analyst at Hargreaves Lansdown, noted that the inflation dip “opens the door” for a December cut, following a predicted November reduction.
Danni Hewson, head of financial analysis at AJ Bell, echoed these sentiments, stating that a November cut is “pretty much nailed on” and expectations for a December cut have “jumped up.”
While this could ease borrowing costs for consumers and businesses, economists like Yael Selfin of KPMG UK caution that inflation could rise again later this year due to increasing household energy bills. This potential rebound in inflation could temper the scope of future rate cuts.
Lower interest rates can provide relief to borrowers, especially those with mortgages, as banks typically pass on the BoE’s base rate changes to customers. However, lower rates also mean reduced returns for savers. While the inflation slowdown may signal a reprieve for some households, it does not mean overall prices are falling—just that they are rising more slowly.
Chancellor Rachel Reeves, who is finalizing the UK’s upcoming budget, will likely take the new inflation data into account as she seeks to balance tax increases and spending cuts. Reeves is tasked with finding £40 billion to avoid real-term cuts to public services and welfare.
Government officials welcomed the inflation decline, with Chief Secretary to the Treasury Darren Jones calling it “good news for millions of families,” though he acknowledged that more work remains to stabilize the economy and protect working people.
BBC, Bloomberg, and Financial Times contributed to this report.
