UK inflation drops to a two-year low of 4.6% for October 2023

The rate of inflation in the UK has dropped to 4.6% in the 12 months up to October 2023, the Office for National Statistics (ONS) has reported. The previous CPI (consumer price index) figure recorded was 6.7% in the year to September 2023. This sharp decrease is the biggest drop in more than 30 years, prompted by the lower cost of gas and electricity. October saw the energy price cap reduced, easing household bills for many in the UK. This was a stark contrast to soaring energy bills a year ago, in the wake of the Russian invasion of Ukraine.

The CPI has not seen such a single month decline since 1992, though the October rate was not far from the 4.8% predicted by economists polled by Reuters. The rate of food inflation has also gone down to 10.1%, its lowest level since June 2022. Core inflation – a figure that does not include food or energy prices – also dropped, from 6.1% to 5.7%. This is lower than the 5.8% forecasted by the Bank of England.

It is important to remember that this change does not signal prices going down. Inflation remains well above the Bank of England’s target rate of 2% and prices continue to rise. What it does signal is an easing in the rate of that rise – the cost of living is still going up, just not as quickly as it was previously.

Why has the rate of inflation decreased?

The key number behind October’s inflation drop was energy bill inflation. The energy price cap change in October represented a 23% cut to the typical annual gas and electricity bill year on year, from £2,500 to £1,923. This still leaves energy bills much higher than most households have been used to over most of the last ten years, but does represent a sharp decrease, big enough to pull the overall inflation figure down.

Food price inflation also fell, but food costs remain high and are continuing to rise. The 10.1% figure for October is less than the 12.2% recorded for September and the 45-year record of 19.2% in March 2023. However, the ONS reported the overall price of food to be around 30% higher than it was in October 2021.

What does the inflation data mean for savers?

Inflation has dropped to a 2-year low, but it remains high, which is bad news for savers. It would be a mistake to assume that high inflation brings high interest rates and better returns on your savings. While it is true that inflation remaining well above the Bank of England’s 2% target means that the base rate of interest could be maintained for longer or increased, high inflation is still bad for your savings.

Firstly, banks take much longer to pass on rate rises to savers than they do borrowers. This means it can take a long time for high inflation figures to translate to a boost in your savings rate. Secondly, inflation erodes the value of cash, so your money in the bank will buy you less as the cost of living goes up.

Slowing inflation is good news for savers, as what you have put away should hold its value for longer. You can find the best savings accounts on our ‘Best savings accounts in the UK’ page.

What does the inflation data mean for mortgages?

Inflation going down could help to reduce mortgage rates in the long term, as the Bank of England would be expected to cut rates as the CPI approaches the Bank’s 2% target.

Unfortunately, it is likely to take many more months of falling inflation to trigger the Bank of England to take action and reduce interest rates. It will want to be confident that reduced inflation is a consistent trend across the economy and unlikely to bounce back up. That said, the latest ONS figures are a step in the right direction for those worried about high interest rates. You can find the best mortgage rates currently available in the UK on our ‘Best mortgage rates in the UK’ page.