Surprising drop in inflation for September

Will it lead to interest rate cuts?

The Office for National Statistics (ONS) reports each month on inflation and other economic indicators each month. During October they reported that their measure for inflation (Consumer Prices Index) fell to 1.7% for the year ending in September. This was an unexpected reduction and is the lowest inflation has been in more than three years.

Drops in airfares and petrol were the main reasons for the reduction. The Bank of England targets 2% inflation, so this reduction may allow them to cut interest rates further when they meet on 7 November. Due to the reduction, there is now also some expectation that there could be a second rate cut in December.

The September inflation figure is an important one since it’s normally used to set how much state benefits increase next April. These include Universal Credit, disability benefits, and carer’s allowance. Lower inflation may lead to lower increases in these allowances.

Some are advising that the drop in inflation may just be temporary. That’s because energy prices increased during October, which may swing the picture once again.