Headline Inflation Falls Below BoE Target

Figures released this morning indicate that UK inflation came in below forecasts for September, with headline CPI easing from 2.2% in August to 1.7% last month.

This brings inflation down to its lowest level since April 2021, and below the Bank of England’s 2% target rate.

The print also marks a departure from the trend seen over July and August’s when inflation rose back above the 2% target rate seen during May and June.

On a monthly basis prices were flat, marking a considerable slowdown from August’s print where prices rose 0.3%.

The fall in the rate of inflation comes as price pressures eased for airfares, petrol (which fell to 136.8 pence per litre in September 2024 from 153.6 pence per litre in September 2023) and furniture.

When excluding the volatile components of food and energy, core inflation also came in 20bps lower than forecast, hitting 3.2%. This comes as service price inflation eased to its lowest level since May 2022.

While policy makers – both at Threadneedle Street and the Treasury – will have taken some comfort this morning’s figures, the UK is not out of the woods when it comes to its fight against inflation. For example, it’s worth noting that the owner-occupier housing costs (which is excluded from CPI), rose by 7.1% on an annualised basis, its highest level in 32 years.

Given that this includes mortgages and council tax – which are excluded from the CPI – this is often considered a more comprehensive gauge of inflation, and its rise is indicative of the cost pressures still facing households.

Following the release of today’s inflation figures, money markets are pricing in around a 95% chance of a 25bps November cut.

Attention now turns to the Budget on 30 November ahead of the BoE’s monetary policy committee meeting on 7 November.

No.11 will be closely monitoring this morning’s inflation figures as speculation continues to mount on what will (and will not) be included in the Chancellor’s Budget.

In August, the PM warned from the Rose Garden of Downing Street that “there is a budget coming in October, and it is going to be painful”. Here, Sir Keir Starmer signalled that there would be “big asks” come October with his comments coming in the wake of Labour announcing emergency savings measures to sure up what they identified as a £22bn “black hole” in the nation’s finances (though exact details remain unclear).

Headlines circulating this week include reports that Rachel Reeves will announce fiscal tightening measures of up to £40bn. According to the IFS, this would increase the tax burden to 38% – its highest level in modern day peacetime Britain.

As we looked at earlier this week, speculation is continuing to mount that the government could increase employer’s contributions to National Insurance, alongside increasing tax on capital gains, inheritance and pensions.