Inflation fell more sharply than expected last month to its lowest level in more than three years raising hopes of back to back interest rate cuts before Christmas.
The headline measure of the cost of living - the Consumer Price Index (CPI) - dropped from 2.2% in August to 1.7% in September, according to latest data from the Office for National Statistics (ONS).
The fall was bigger than forecast by City economists who had been pencilling in a figure of 1.9%.
It is the first time inflation has been below the Bank of England’s 2% target since April 2021, when it stood at 1.5%.
That makes a cut in interest rates from the Bank when its Monetary Policy Committee meets on 7 November more likely, with a second move in December now on the table, according to City analysts.
Simon French, chief economist at City investment bank Panmure Liberium, said: ”November and December now in play for back to back interest rate cuts.” That would bring the cost of borrowing down from its current level of 5% to 4.5%.
The achievement will be a source of quiet satisfaction to the Banks Governor Andrew Bailey and his fellow MPC members who have sometimes faced criticism for keeping interest rates too high too long in the painful slog to keep bring inflation back under control. The CPI inflation rate reached a peak of 11.1% in October 2022 after Russia’s full scale invasion of Ukraine sent energy prices soaring.
The big fall is also a welcome boost for Rachel Reeves ahead of her Budget announcement on 30 October as faster interest rate cuts are likely to propel economic growth.
The ONS said downward pressure on the rate of inflation came from an unusually large drop in air fares between the August peak and September, and a 5.5p average fall in petrol prices. Food prices were up 1.8%, up from 1.3% in August.
Services inflation, a closely watched indicator of the pace of domestically generated price rises, slowed to 4.9% from 5.6%.
Chief Secretary to the Treasury, Darren Jones, said: “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”.
ONS Chief Economist Grant Fitzner said: “Inflation eased in September to its lowest annual rate in over three years. Lower airfares and petrol prices were the biggest driver for this month’s fall.
“These were partially offset by increases for food and non-alcoholic drinks, the first time that food price inflation has strengthened since early last year.
“Meanwhile the cost of raw materials for businesses fell again, driven by lower crude oil prices.”
We can finally see the light at the end of the tunnel in the fight against inflation.
Joe Nellis, economic adviser to accountants MHA said:. “While core inflation remains higher than desired at 3.2%, the headline inflation rate dropping to a remarkable 1.7%, comfortably below the Bank of England's target of 2% and the lowest rate since April 2021 – indicates that we can finally see the light at the end of the tunnel in the fight against inflation.
“This significant milestone comes a day after wage growth, one of the most impactful inflationary pressures, dropped below 5% for the first time in over two years. This sign of stability is positive news for the Government ahead of the Budget later this month, as they look to showcase Britain as a safe bet for domestic and international investment.”
