Inflation stayed flat at 6.7 per cent in the year to September, official figures released by the Office for National Statistics (ONS) show.
Forecasters had predicted a slight fall, but higher petrol costs and the price of hotel stays resulted in the rate staying put, according to the ONS.
Food and non-alcoholic drink prices fell by 0.1 per cent between August and September, the first drop for two years. The largest driver of lower food inflation was falls in the price of staples such as milk, cheese, eggs and soft drinks.
Core inflation – which measures inflation without food and energy prices – dropped from 6.2 to 6.1 per cent, according to the figures released on Wednesday. This will be seen as welcome news as it is used to judge the future path of inflation and is monitored carefully by the Bank of England when setting interest rates.
The official rate of inflation, known as the Consumer Prices Index, has been falling steadily since the end of 2022, when it peaked at 11.1 per cent.
Chancellor Jeremy Hunt said: “As we have seen across other G7 countries, inflation rarely falls in a straight line, but if we stick to our plan then we still expect it to keep falling this year. Today’s news just shows this is even more important so we can ease the pressure on families and businesses.”
Here’s what the falling rate means for you and your money.
Is Rishi Sunak likely to hit his inflation target?
Earlier this year, as inflation sat above 10 per cent, Rishi Sunak pledged to halve inflation by the end of 2023, meaning it would sit at just above 5 per cent by December.
Experts think the current rate is on track to hit this level in the next few months.
Sanjay Raja, chief UK economist at Deutsche Bank, has said: “By year-end, we think headline CPI will have slowed to around 4.5 per cent – firmly below the Government’s pledge to halve inflation from the start of the year.”
The Bank of England itself has said: “We expect inflation to fall to around 5 per cent by the end of 2023,” suggesting the target will be hit.
When will inflation get back to ‘normal’?
The Bank of England’s target rate for inflation is 2 per cent – so the current figure is still far above this. It has said it expects inflation to reach its 2 per cent target in the first half of 2025.
Others have agreed with this projection. Mr Raja has said: “When will we get to target? We still think 2025, but risks are skewed to an earlier landing.”
What will happen to interest rates?
Inflation is one of the main factors that influence whether the Bank of England chooses to raise or lower the base rate, which determines how expensive mortgages are.
The base rate is currently 5.25 per cent, after the Bank opted to hold rates steady in its September meeting for the first time in more than 18 months.
The Bank generally raises rates to combat inflation. The logic is that if borrowing is more expensive, then people have less money to spend, and so there is less demand for goods and services.
After the recent hold, forecasters have suggested that, bar major surprises in inflation figures, rates should remain at their current level for now.
Ashley Webb, economist at Capital Economics, told i: “We still think interest rates are at their peak. That said, as we expect core inflation to fall only slowly, we think the Bank will keep rates at their peak until late in 2024.”
The Bank of England will be carefully monitoring high wage growth rate. Officials figures suggest that average weekly earnings, excluding bonuses, grew by 7.8 per cent in the three months to August – a higher rate than inflation.
Paula Bejarano Carbo, associate economist at NIESR, said: “On the one hand, this is positive in that it implies that workers in both the public and private sectors are seeing real average pay increases in for the first time in roughly two years; on the other hand, elevated wage growth continues to challenge monetary policymakers’ efforts to tame inflation.”
Will mortgage rates go down?
Mortgages are not directly affected by inflation, although many products are affected by the Bank of England’s base rate, which inflation influences.
Fixed-rate products are not immediately affected by any change in interest rates, although they do go up or down based on long-term predictions of where interest rates will go.
These mortgages – generally the cheapest – are already slowly falling, as banks and other lenders have forecast that rates are at their pea.
A small “rate war” is taking place between lenders to attract business, after a slow property market in the first part of this year meant many were behind target for deals secured. the lack of a surprise in today’s figures means this should continue.
Rates of below 5 per cent have returned to the market recently – Halifax launched a five-year deal at 4.73 per cent last week. Nick Mendes, mortgage technical manager at John Charcol brokers, has said that we could see a return to five-year fixes of under 4.5 per cent by the end of the month on current trajectories.
Elliott Culley, director at Switch Mortgage Finance said lenders would be trying “to get as much business in as possible before the end of the year” and that the mortgage market was “likely to remain competitive” in the short term.
Peter Stamford, director at Moor Mortgages, said: “We could see rates inching down as lenders hustle for year-end business.”
How will inflation affect savings?
Inflation is bad news for savers as it erodes the value of money held in the bank. Even though the best-paying easy-access accounts are offering 5 per cent or more, inflation is still higher – meaning your savings are effectively worth less each year, comparatively speaking, even with the interest added.
The best two easy-access accounts are from Ulster Bank and Coventry Building Society, which each pay 5.2 per cent. You can get more money if you lock away your cash in a fixed-rate account. Ahli United Bank UK via Raisin has a one-year fixed account paying 6.1 per cent, but if you open this now you won’t be able to touch the money until October 2024.
Anna Bowes, founder of Savings Champion, has noted that falling inflation can help “mitigate” against this to an extent if interest on savings accounts stays the same.
How does falling inflation affect benefits?
September’s CPI figure is typically used as the benchmark for uprating working-age benefits, such as jobseeker’s allowance, next April.
This is not guaranteed, and on various occasions in the past decade, the government has opted for lower increases.
Whether it does so this time is likely to be announced in next month’s Autumn Statement. However, Jeremy Hunt has been warned that freezing benefits would result in more children being pushed into poverty.
So inflation nudging down is good news in this sense, though it is set to be a relatively small change.
How does inflation affect food prices?
While inflation is a measure of price rises, it accounts for a wide range of goods and services including petrol, insurance and other products, and it does not affect them all equally.
Food inflation has been running higher than average price rises, however. In August’s ONS data it stood at 13.6 per cent and in the latest figures it stands at 12.2 per cent.
And there is hope inflation could fall further, as on Tuesday it was revealed that prices charged by food and drink manufacturers fell last month at the fastest rate in over three years, according to the Lloyds Bank UK Sector Tracker.
However food inflation is still very high. Although food prices fell 0.1% between August and September, they are still 12.2 per cent up when compared to a year ago.
What does inflation falling mean for your pension?
As with savings, higher inflation is generally bad news for people with pensions, or those currently saving for one, as it reduces the true spending power of their pots. If inflation is falling, that means that this effect is lessened.
For example, if you are 67 and plan to retire in a year, assuming you have a pot of £87,500 in today’s money – roughly the average someone over 50 will have by retirement, according to Pension Bee – then one year later, if inflation runs at 10 per cent, and your investment growth is 5 per cent, your pot would be worth £91,263.
But in real terms, your pot would be worth the equivalent of £83,650, adjusted for today’s money.
However, there is a secondary effect of higher inflation. September’s CPI figure can be used to determine the state pension increase for next year – although this is unlikely this time around.
Under the Government’s triple-lock policy, the state pension is increased in line with the highest of three measures – a flat 2.5 per cent rise, average earnings growth measured from May to July each year, or inflation measured in the year from September.
In August, average wage growth rose above inflation for the first time in almost two years, according to the ONS. It said annual growth in regular pay, excluding bonuses, was 7.8% in the three months to August.
