Inflation falls below the Bank of England’s target for the first time in more than three years

Another interest rate cut looks likely next month, after the UK inflation rate fell more than many analysts expected in today’s report.

The consumer price index (CPI) slowed to 1.7% annually in September. This is the lowest rate in more than three years. The last time inflation was lower was in April 2021, according to data from the National Statistics Office (ONS).

Many analysts had expected September’s inflation rate to fall below 2%, but the scale of the fall was greater than expected. Experts at ING and Capital Economics predicted a fall of as much as 1.9%, while Deutsche Bank said the CPI could fall as much as 1.8%.

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Perhaps more significantly, services inflation fell from 5.6% to 4.9%, a significant move in the right direction. The Bank of England tracks the metric closely, as the services sector accounts for around 80% of the UK economy. Services inflation has been sticky in previous reports.

Core inflation (which strips out volatile categories such as energy, food, alcohol and tobacco) also slowed to 3.2%, down from 3.6% in August.

A positive inflation rate means that prices are generally still rising, but at a significantly slower rate than before. Recall that inflation peaked at 11.1% in October 2021. However, it is expected to pick up next month after the energy price cap rose by 10% in October 1

“If measured against a fall a year earlier, (energy price rises are) going to look particularly severe,” says Sarah Coles, head of personal finance at Hargreaves Lansdown. “Gasoline prices are likely to add insult to injury. They will return to an upward trajectory thanks to the conflict in the Middle East and rising oil prices,” he adds.

Let’s take a closer look at what the latest inflation reading means for the outlook for interest rates and your personal finances.

Where do prices go up and where do they go down?

The largest downward contribution to the monthly change in the CPI comes from transport, according to the ONS. Air fares fell 34.8% in September, as is usual after the busy summer period. Petrol and diesel prices also fell by 5.5p and 6p per liter respectively.

Meanwhile, the biggest offsetting contribution to the rise came from food and non-alcoholic beverages. The price of milk, cheese, eggs, mineral waters, soft drinks, juices and fruit increased in September.

“While the latest inflation data looks positive for consumers, almost three years of rapid price rises have taken their toll on household budgets,” says Alice Haine, personal finance analyst at Bestinvest.

It adds that “many are still trying to balance the books as their finances slowly recover from the high debt and living costs seen at the height of cost-of-living pressure.”

If another key rate cut materializes in November, as widely predicted, it could further ease the pain for consumers struggling with higher borrowing costs. Mortgage rates have fallen significantly since 2023 highs, but remain high.

Will interest rates go down in November?

The latest inflation figure will be welcomed by those expecting a rate cut at the Bank of England’s next meeting on November 7.

Governor Andrew Bailey said recently the guardian that UK policymakers could become “a bit more aggressive” in their approach if inflation continues to cool, and is now showing signs of doing so.

Today’s report showed a significant deceleration in headline rate, services inflation and core inflation. This follows yesterday’s labor market report, which showed wages are now growing at the slowest pace in more than two years.

Against this background, a 0.25% cut is “just about right” in November, according to Danni Hewson, head of financial analysis at AJ Bell. He adds that expectations for December have also risen, with markets pricing in more than an 80% chance of consecutive cuts. This would bring the base rate to 4.5% by the end of the year.

However, households and investors should not count their chickens before they have hatched. We still have the budget to approve on October 30. This will take place eight days before the next meeting of the Monetary Policy Committee (MPC).

The Prime Minister has already warned that the Budget will be “painful”, fueling speculation that several taxes will rise. Speculation has also increased in recent weeks that chancellor Rachel Reeves could change the government’s borrowing rules to facilitate more investment in the UK economy.

The Bank of England will be watching closely to understand how the announced measures affect economic data.

What do the latest inflation numbers mean for your personal finances?

It is always important to monitor inflation and its impact on your finances as it is one of the biggest destroyers of wealth. However, September’s CPI report is more significant than most as it is used to calculate a range of government benefits, including the State Pension.

Under triple-lock rules, state pension payments rise each year in line with earnings growth, inflation or 2.5%, whichever is higher. The criteria used are the September CPI reading and the May-July earnings growth figure.

This year, profit growth (4.1%) has been higher than September’s CPI. It was also higher than the minimum increase of 2.5%.

“The latest official figures point to a virtually 4.1% rise in State Pension pensioners’ incomes from next April,” says Becky O’Connor, director of public affairs at PensionBee.

He adds: “For a retiree on the new full state pension, this means an increase of £473, taking their annual income to £11,975 and approaching their personal income tax allowance of £12,570.

“Most pensioners do not receive the full amount of the state pension and most also have to factor in the loss of winter fuel payments. So this increase will be welcome, but the edge can be taken off with cuts in other places.”

What does the latest CPI report mean for savings?

Today’s inflation reading also has broad implications for savers as markets brace for a likely rate cut in November. There is now only a short window of opportunity to lock in higher interest rates by opening a fixed rate account.

We’ve already seen how quickly savings rates can plummet after a base rate cut, with numerous providers cutting their rates following the Bank of England’s decision on 1 August . In this context, a one- or two-year fixed-rate bond might be attractive, but remember that you won’t be able to access the cash until the fixed period ends.

You should also review the rate on easy access accounts periodically to ensure they are still competitive. Loyalty rarely pays when it comes to savings providers. Comparison sites can be useful and you may find that challenger banks offer better deals than some of the high street giants.

Before opening an account, always check that it is covered by the Financial Services Compensation Scheme. Challenger banks covered by this scheme enjoy the same £85,000 protection as high street names.

See our roundup of the best easy access rates, one-year savings accounts, regular savings accounts and cash ISAs for the latest cash savings deals.

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