Decline in Air Fares and Petrol Prices Drive Inflation Down

UK inflation falls to 3-year low boosting hopes for another rate cut |  Euronews

In September, the UK experienced a significant decrease in inflation, reaching its lowest point in over three years. This has fueled speculation that the Bank of England might proceed with another interest rate reduction in the coming weeks.

The Office for National Statistics (ONS) reported that consumer prices increased by 1.7% in September, a drop from the 2.2% increase recorded in August. This decrease was mainly attributed to lower air travel costs and petrol prices. However, some areas saw price hikes, with food prices rising by 1.9% and services becoming 4.9% more expensive compared to the previous year.

Core inflation, which excludes volatile elements such as food and energy prices, also dropped, falling to 3.2% in September from 3.6% in the prior month. This sharper-than-expected decline was more substantial than the 1.9% anticipated by analysts, marking the first time since 2021 that inflation has fallen below the Bank of England’s target of 2%.

The drop in inflation has solidified expectations that the central bank will cut interest rates again. The bank’s monetary policy committee is now expected to reduce its main interest rate from 5% to 4.75% at its upcoming November meeting. This would follow the rate cut implemented in August, which was the first reduction since the early stages of the COVID-19 pandemic in 2020.

Economists have pointed out that the September inflation data paves the way for further interest rate cuts. One economist noted that a quarter-point rate cut in November is almost certain and that this data makes it more likely that another cut will follow in December.

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Over the last few years, central banks worldwide have raised borrowing costs significantly, reacting to surging inflation caused by a combination of supply chain disruptions during the pandemic and rising energy prices following the invasion of Ukraine. With inflation now falling from its peak levels, many central banks, including the Bank of England, have begun to lower interest rates in response to the changing economic landscape.

The anticipation of further rate cuts is also tied to the upcoming release of the UK government’s budget at the end of October. The new Labour government has indicated that it may need to implement tax increases and spending cuts to address a substantial shortfall in public finances, amounting to £22 billion. These measures could put downward pressure on the economy and inflation in the short term.

The reduction in inflation has brought some positive news for the UK Treasury. The lower inflation rate in September is important for the Treasury, as it is used to calculate the annual benefits provided by the government. Additionally, the prospect of falling borrowing rates is beneficial for the government, as it would reduce the cost of servicing its debt, potentially providing some financial flexibility to the Treasury as it prepares to address the budget deficit.The lower inflation figures from September bring multiple implications for the UK’s economic outlook, as well as for government policy. Treasury chief Rachel Reeves, who is preparing to present her first budget, could benefit from this dip in inflation. Lower inflation means a reduced burden on the government when it comes to certain public expenditures, as many social benefits are indexed to inflation rates. This could help ease the pressure on public finances, which are already facing a significant shortfall of £22 billion.

The Labour government has been vocal about the need to address this financial gap, and measures such as tax increases or spending reductions are on the table. While these actions may be necessary to balance the budget, they could also slow economic growth in the near term, adding complexity to the broader economic recovery.

At the same time, lower inflation and potential interest rate cuts offer some relief to both the government and households. With borrowing costs likely to decrease, the government’s interest payments on its debt could shrink, providing more flexibility in fiscal planning. Similarly, for individuals and businesses, lower interest rates could reduce the cost of borrowing, offering a reprieve for homeowners with mortgages and businesses seeking investment.

Despite this positive news, it’s important to note that the fall in inflation is not entirely beneficial for everyone. While lower inflation typically suggests an easing of price pressures, certain sectors of the economy are still experiencing significant cost increases. For example, food prices rose by 1.9% in September, putting additional pressure on households struggling with the cost of living. The rise in service costs, up by 4.9% year-over-year, also highlights ongoing challenges in sectors such as hospitality, transport, and utilities, where inflationary pressures remain high.

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Moreover, the broader economic outlook remains uncertain. While inflation has dropped, the UK economy still faces several headwinds, including the possibility of further tax increases, the global economic slowdown, and ongoing trade disruptions linked to geopolitical factors such as the war in Ukraine. The balance between managing inflation, stimulating growth, and ensuring fiscal sustainability will be critical for the Labour government as it navigates the months ahead.

Looking ahead, all eyes are on the Bank of England’s next meeting, where a rate cut seems almost certain. However, how the central bank manages interest rate policy beyond November will depend on a range of factors, including how inflation evolves, the impact of fiscal policy decisions, and the state of the global economy.

the significant drop in UK inflation has generated optimism for additional interest rate cuts, offering some economic relief. However, challenges remain, particularly in areas such as food prices and services, which are still experiencing inflationary pressures. The government’s upcoming budget and the Bank of England’s next moves will play a crucial role in shaping the country’s economic path in the months ahead.

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