Inflation has once again fallen below the Bank of England target of 2% – and to the lowest level in three years.
The Consumer Price Index (CPI) level of inflation dropped to 1.7% in the 12 months to September. This is the lowest rate the UK has seen since April 2021 when it was 1.5%. Economists predicted a drop this month, with some believing it could fall to this level. Today’s figure sees inflation fall back below the Bank of England’s target of 2%, which may now fuel the fire for another rate cut when the Bank’s Monetary Policy Committee (MPC) meets next month on November 7.
It’s important to remember that this drop in inflation does not mean prices are falling. It just means they are rising at a slower rate. According to today’s analysis, lower airfares and petrol prices drove down inflation. However at the same time there was a pick up in
ONS Chief Economist Grant Fitzner commented: “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.”
The September rate of inflation is also important as it is used to decide how much benefits will rise by next April. It also affects state pensions, as today’s figure will confirm whether payments will rise by 4% under the triple lock. Chancellor Rachel Reeves said in 2023 that benefits would be uprated by September’s inflation figure under a Labour government as it was “tradition”.
What inflation means for you
Inflation measures how prices have changed over time. For example, if something cost £1 last year but now costs £1.03, then the rate of inflation on that particular item is 3%. The main CPI figure is used as an average – so individual prices of some goods may be higher or lower than this. The Office for National Statistics (ONS) releases inflation data every month and uses a “basket of goods” and services, which are regularly updated, to track prices.
How inflation links to interest rates
The Bank of England began raising interest rates in 2021 to try and bring inflation down. The theory is, that when interest rates go up, the cost of borrowing becomes more expensive – then in return, people should then spend less, bringing demand and prices down. The base rate stood at just 0.1% in December 2021 and rose to 5.25% in August 2023. It remained the same until August 2024 when it was cut by 0.25 percentage points to 5%. It has remained at this level ever since.
How does inflation link to DWP state pension and benefits
Inflation has an impact on how much the state pension and some government benefits will rise by each year. For benefits, they should increase each April by September’s rate of inflation. This is different to the state pension as the Triple Lock promise covers this.
Under the triple lock promise, state pension payments rise by whatever is highest out of the Consumer Price Index (CPI) for September, the average growth for wages between May and July, or 2.5%.
Last month, it was confirmed that the wage growth rate sat at 4% – this means state pension payments will rise by this amount next April rather than inflation. Usually, any state pension rises are confirmed in the Autumn Budget, however, Rachel Reeves confirmed this week that state pension payments would be rising by around £450 next year.
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