The Bank of England's target is 2%, meaning that the lower-than-expected rise in inflation is below target for the first time since April 2021. In fact, this is the lowest inflation rate recorded in more than three years, making a November base rate cut more likely.
The latest figures are based on the Consumer Price Index (CPI). Transport, in particular airfares and motor fuels, were the biggest contributors to the fall in inflation. Overall prices in transport fell by 2.4% in the year to 2024. Food and non-alcoholic beverages, on the other hand, pushed inflation upwards with prices rising by 1.8% in the year to September.
Experts across the board are carefully optimistic about the fall in inflation, with many referring to it as "temporary" due to expected price hikes in the energy sector during the winter months. That said, the fall in inflation makes it more likely that we will see at least one Bank of England base rate cut before the end of the year.
Will inflation remain low?
While the current inflation figures are unexpectedly low, it's expected that inflation levels will increase again. In October, the energy price cap is due to go up by 10% which could push the headline inflation rate up by 0.5%. Experts from the National Institute of Economic and Social Research (NIESR) believe this could result in inflation rising to 2.5% by the end of the year - an increase which will be largely driven by base rate effects and the energy price cap.
The NIESR's underlying inflation measure, which excludes the highest and lowest price changes in order to account for volatility, has remained at 1.4% which is the lowest figure in almost three years. The relatively low and stable underlying inflation figure suggests that prices are falling for most items with the headline inflation rate being driven by larger price increases in a small number of sectors.
Monica Michail, Associate Economist at NIESR, added: "We forecast headline inflation to gently rise again towards the end of the year as base effects drop out, in addition to the OFGEM price cap increase in October, which we estimate would raise the headline rate by 0.5 percentage points."
Experts elsewhere echo the NIESR's conclusions. Myron Jobson, Senior Personal Finance Analyst at Interactive Investor, said: "The pace of price rises hasn’t been this low since the days of Covid lockdowns. It is important to remember that inflation doesn’t slow in a straight line.
"Inflation is likely to rise again with household energy increasing by 10% at the start of the month. However, the overall trend in inflation is certainly one of slowing and suggests that high inflation has been well and truly tamed."
Overall, the general feeling is that while we might see slight rises in inflation during the winter months, the increases will not be extreme.
Is a base rate cut likely in November?
The surprising drop in inflation makes it likelier that the Bank of England will choose to cut rates in November. Some experts believe that the lower-than-expected inflation coupled with expected tax rises during the October budget could lead to a half-point cut in the base rate in November. Julian Jessop, Economics Fellow at the free market think tank, the Institute of Economic Affairs, said:
“Admittedly, the September numbers were flattered by swings in transport costs. The rise in domestic energy bills also still means that inflation will jump above the 2% target again in October. Nonetheless, inflation is set to be lower than the Bank of England had been forecasting...
“The Bank should therefore reduce rates by at least a quarter point at the November MPC meeting. Indeed, a large package of tax rises in the October Budget could tip the balance towards a half-point cut.”
In fact, with inflation falling below expected levels, some experts argue we might see a double base rate cut before Christmas. After November 7th, the Monetary Policy Committee will meet again on December 19th, meaning there are two more opportunities this year to cut the base rate.
Others, however, are less confident. Martin Sartorius, Principal Economist at the Confederation of British Industry (CBI) said: “Below-target inflation in September makes it increasingly likely that the MPC will choose to cut rates in November. However, some members of the MPC will remain wary of the upside risk that sticky services inflation poses to the outlook. Therefore, we still expect to see a gradual path for interest rate cuts in the near term.”
As such, while a November base rate cut is likely, confidence is lower when it comes to a potential December base rate cut.
How will the fall in inflation impact savings and mortgage rates?
The fall in inflation means that the Bank of England base rate, which currently stands at 5% following a cut in August, is more likely to be cut in November especially as inflation fell below the Bank of England's target of 2%.
The inflation figure was unexpectedly low, and while it might not directly cause a fall in mortgage and savings rates, if it prompts a base rate cut then we could see changes in the rates of these products too. This is good news for those who have a mortgage and want to secure a lower rate, but bad news for savers looking for high-interest savings accounts.
For those looking for a place to put their money, now might be a good time to check out the savings accounts paying at least 5% on your savings. While these products will likely dwindle in the coming months, there are still deals to be had.
Those looking for the best mortgage deals are likely to be more optimistic about their prospects after the latest inflation figure too. Certain providers pulled or increased their mortgage rates earlier this month, in part due to confusion and uncertainty arising from the Labour budget that is due to take place later this month. However, an unexpected fall in inflation opens the doors to larger base rate cuts, which could see better mortgage deals on the market.
For those looking for a mortgage deal, check out the best mortgage rates in the UK to compare the best fixed-rate and tracker mortgage products on the market right now.
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