Inflation fell by more than expected in September 2024, across both its key measures, raising hopes that the Bank of England (BoE) will cut interest rates next month (November).
The Consumer Prices Index (CPI) dropped to 1.7 percent in the 12 months to September 2024, down from 2.2 percent in August, while the Consumer Prices Index including owner occupiers’ housing costs (CPIH) also dropped, falling to 2.6 percent in September, down from 3.1 percent in August.
The drop in CPI represents the first time that inflation has fallen below the BoE’s 2 percent target in three-and-a-half years.
ONS data showed that lower cost air fares and motor fuels contributed to falling inflation for both measures, while price increases for food and non-alcoholic beverages prevented inflation tumbling even further.
Interest rates ‘higher than needed’
Julian Jessop, economics fellow at the Institute of Economic Affairs, said: “Today’s better than expected inflation data adds to the growing evidence that UK interest rates are far higher than they need to be. The cooling in the labour market should also ease fears about services inflation.”
He admitted that the September numbers were “flattered by swings in transport costs”, while the rise in domestic energy bills means that inflation will “jump above the 2 percent target again in October”.
“Nonetheless, inflation is set to be lower than the BoE had been forecasting,” he said. “The gradual pass through of previous interest rate rises and the rapid slowdown in the growth of the money supply mean that the risks will remain on the downside.
“The BoE should therefore reduce rates by at least a quarter point at the November Monetary Policy Committee (MPC) meeting. Indeed, a large package of tax rises in the October Budget could tip the balance towards a half point cut.”
Household cheer
CBI principal economist Martin Sartorius said that inflation below the BoE’s target “will come as good news to households”.
He said that while headline inflation is still set to tick up in the latter part of this year, this latest data will reassure members of the MPC that price pressures are easing.
“Below-target inflation in September makes it increasingly likely that the MPC will choose to cut rates in November. However, some members of the MPC will remain wary of the upside risk that sticky services inflation poses to the outlook. Therefore, we still expect to see a gradual path for interest rate cuts in the near term.”
Revised earnings
David Brooks, head of policy at consultancy Broadstone, said the fall in inflation means that the revised earnings growth figure of 4.1 percent, released by ONS yesterday, is likely to trigger around a £473 a year inflation-busting boost to the state pension from April 2025.
“Given the loss of winter fuel payments for those not claiming in pension credit, this will be a welcome financial boost for many pensioners,” he said. “It must be noted that not everyone will benefit from the full £473 a year rise, as that will only be the increase for those claiming the full amount of new state pension.”
DB income boost
Brooks said that many people with defined benefit (DB) pensions will also see their annual income uprated in line with inflation, which will deliver another boost to their regular income.
“The slowdown in inflation compared to the past couple of years is also positive for those whose DB pensions are not index-linked but are instead fixed or capped, typically at 2.5 percent or 5 percent, and is likely to take some of the heat out of vociferous calls for discretionary increases that we have seen over the past couple of years.”
The latest ONS figures were deemed further evidence that inflation continues to move away from a prolonged period of high inflation, according to British Chambers of Commerce head of research David Bharier.
“Coupled with an easing to average earnings growth, businesses will be looking forward to a clearer path for further interest rate cuts,” he said.
Business concerns ease
Bharier continued: “Our research has shown that a steadily declining number of businesses are concerned about inflation. In our recent Quarterly Economic Survey, 46 percent of businesses cited inflation as concern, down from the all-time high of 84 percent seen in 2022. Taxation has instead emerged as the top issue of concern.
“However, major uncertainties remain. With escalations in the Middle East conflict, oil and energy prices are likely to be impacted. Our latest forecast expects inflation to tick higher towards the end of the year at 2.6 percent. Core inflation also remains quite stubborn and owner occupiers’ housing costs continue to rise.
“This month’s budget is a critical juncture. Businesses will need to see action on implementing an effective industrial strategy, solving the investment puzzle and supporting global trade, particularly with the EU.”
