UK Inflation Falls Below 2% Target
Shock Fall - September inflation data
Inflation has fallen below the 2% target for the first time in more than three years in a shock fall announced today at 7am. The 1.7% rate for September marks the lowest level since April 2021, when it was recorded at 1.5%. This represents a decrease from August's 2.2%. While analysts anticipated a decline, they expected it to only reach 1.9%. Looking ahead, inflation is likely to rise again when we receive the October data in a month, primarily due to increasing energy prices.
Although CPI services inflation is expected to continue its gradual decline, they project CPI inflation will rise to 2.8% by December and reach 3% by next September. While this may sound somewhat pessimistic, it's important to remember that inflation peaked at 11.1% in October 2022 during the peak of the cost of living crisis. The recent drop to what is considered "normal" levels is setting the stage for potential interest rate cuts. The next decision regarding rates is scheduled for November 7, with analysts predicting a reduction from 5% to 4.75%.
Main points - UK Inflation Falls Below 2% Target
- Producer input prices fell by 2.3% in the year to September 2024, down from a revised decrease of 1.0% in the year to August.
- Producer output (factory gate) prices fell by 0.7% in the year to September 2024, down from a revised increase of 0.3% in the year to August.
- On a monthly basis, producer input prices fell by 1.0%, while output (factory gate) prices fell by 0.5% in September 2024.
- Services producer prices rose by 3.3% in the year to Quarter 3 (July to Sept) 2024, up from a revised increase of 3.2% in the year to Quarter 2 (Apr to June).
What was behind the drop?
The Office for National Statistics says: "The largest downward contribution came from transport, with larger negative contributions from air fares and motor fuels; the largest offsetting upward contribution came from food and non-alcoholic beverages."
Why does inflation impact interest rates?
Inflation has a significant effect on interest rates for several reasons. The Bank of England often increases interest rates to curb spending and promote saving. This strategy typically leads to a decrease in prices and inflation. As inflation decreases, interest rates usually follow suit.
Markets were already pricing a 80% likelihood of an interest rate cut before the announcement, and it seems almost certain that interest rates will decrease at the upcoming meeting, which is great news for consumers. The next decision on rates is set for November 7, with analysts predicting a drop from 5% to 4.75%.
Potential winners and losers from high inflation
There are both potential beneficiaries and those who may suffer from high inflation. In general, a high and unpredictable inflation rate is seen as harmful to the economy, but some individuals might find advantages in it. Workers who have strong bargaining power, such as those in robust trade unions, may benefit as they can negotiate for higher wages to protect their earnings. Producers might also gain if their prices increase faster than their production costs.
Additionally, individuals holding stocks or real estate could see their asset values rise during prolonged periods of inflation. On the other hand, retirees living on fixed incomes are likely to struggle, as inflation diminishes the real value of their pensions and savings. The most vulnerable members of society will also be hit hardest, facing higher costs for borrowing, food, and essential utilities.
