UK Inflation Drops to 3-Year Low, Sparking Rate Cut Expectations

Inflation in the United Kingdom has fallen to its lowest level in over three years, according to official figures released on Wednesday. This drop has solidified market expectations that the Bank of England will reduce interest rates during its next policy meeting in November.

Key Inflation Figures

The Office for National Statistics reported that consumer prices rose by 1.7% in September 2024, down from 2.2% in August. The decline is largely attributed to falling airfares and petrol prices, though price pressures have eased across the economy, including the services sector, which comprises about 80% of the UK’s GDP. This widespread reduction in inflation has raised concerns among policymakers, as it may signal weakening demand.

For further insights on the UK’s inflation trends, see ONS - UK Inflation Data.

Impact on Bank of England’s Monetary Policy

The inflation rate dropped more than economists had expected. Many had forecast a decrease to 1.9%, but the actual figure came in at 1.7%, marking the first time inflation has been below the Bank of England’s 2% target since 2021. As a result, experts now predict that the Bank of England will cut interest rates to 4.75% from the current 5% when it meets in early November. This would follow its rate cut in August, the first since the early stages of the COVID-19 pandemic.

Luke Bartholomew, an economist at abrdn, said that a quarter-point rate cut in November is nearly certain, and he expects another reduction in December. This rate reduction follows similar actions taken by central banks globally, including the U.S. Federal Reserve and the European Central Bank, all of which have started to ease rates after aggressive hikes to combat inflation.

To understand more about global central bank policies, check out Reuters - Global Central Bank Moves.

Winners and Losers in the Economy

While the lower inflation rate offers some relief to the UK government, particularly ahead of its budget announcement on October 30, it has had mixed effects on lower-income households. This is because government benefits are linked to the September inflation rate, meaning the drop in inflation could lead to smaller benefit increases for many families next year.

The drop in inflation could signal economic cooling, which may benefit some households by lowering the cost of living, but it may also strain families relying on state assistance as the benefit adjustments lag behind the true cost of living.

For more on UK fiscal policy and benefits, see BBC News - UK Inflation and Benefits.

Conclusion

The UK’s inflation slowdown, while a positive development for the economy and central bank policymakers, presents challenges for households relying on government assistance. The Bank of England is expected to lower interest rates in November to support economic recovery, but analysts warn that broader economic adjustments will take time. As the central bank navigates a post-pandemic economy with mixed signals, the path ahead for inflation and rates remains closely watched by both policymakers and the public.

For more about the economic outlook in the UK, see The Guardian - UK Economy.