Inflation in the U.K. has dropped to its lowest level in over three years, according to official figures released on Wednesday. The Office for National Statistics reported that consumer prices rose by 1.7% in September, down from 2.2% the previous month. This decline was primarily driven by lower airfares and petrol prices, contributing to a decrease in price pressures across various sectors, including services, which make up a significant portion of the British economy.
The latest inflation rate is below the Bank of England's target rate of 2% for the first time since 2021. As a result, market expectations are high that the Bank of England will reduce interest rates at its upcoming policy meeting in November. Analysts anticipate a quarter-point rate cut, bringing the main interest rate down to 4.75% from 5%.
This move follows the central bank's previous rate cut in August, marking the first reduction since the early stages of the COVID-19 pandemic in 2020. The decrease in borrowing costs is aimed at curbing inflation, which had surged due to supply chain disruptions and the impact of Russia's invasion of Ukraine on energy prices.
Central banks worldwide have been adjusting interest rates to address inflation concerns. The U.S. Federal Reserve recently lowered its main rate, and the European Central Bank is expected to follow suit. In the U.K., the government's budget announcement on October 30 may influence the Bank of England's decision to further reduce borrowing costs in November.
The lower inflation rate in September is advantageous for the Treasury, as it could lead to reduced interest payments on government debt. However, the timing may pose challenges for vulnerable households, as benefits linked to September's inflation rate could see lower increases next year. This temporary decline in inflation coincides with an expected rise in energy bills in October, which could impact future benefit adjustments for low-to-middle income families.
