Inflation falls to its lowest rate in three years

Inflation has dropped to 1.7%, well below the Bank of England’s target rate of 2%.  

The figures, released this morning from the Office of National Statistics (ONS), show inflation in September fell to its lowest rate since April 2021, when it was 1.5%.

The fall was greater than the 1.9% predicted by economists. It was driven by decreases in transport costs including airfares and motor fuel, which were only slightly offset by rises in food and non-alcoholic drinks.

September’s inflation figures are significant as they are one of the measures used to set benefits and state pension rises next April under the triple lock promise.

The triple lock ensures that benefits payments and the state pension rise in line with the cost of living each year. The government uses the highest of three measures to set the increase:

• September’s inflation figures
• The average increase in wage growth from May to June
• Or 2.5%

Wage growth came in at 4%, so this will be the figure used for the triple lock next year. This could mean state pension payments rise by £460 next April.

September’s dip in inflation will also increase the pressure on the Bank of England to cut interest rates when it next meets on 7 November.

The bank’s governor, Andrew Bailey, recently said they could be ‘more aggressive’ with rate cuts if inflation remained under control. Despite this optimism, economists have only forecast a 0.25% reduction, which will take interest rates to 4.7%.

This could be the last drop we see in inflation for some time, with figures expected to nudge up again in October because of rising energy costs.

Economists believe inflation will rise to 2.8% in December and will hit 3% next September. But this is far below when inflation peaked at 11.1% in October 2022 during the cost of living crisis.

What is inflation?

Inflation reflects how much the prices of goods and services increase over time. When inflation happens, your buying power decreases. This means your money doesn’t go as far and you end up buying fewer things with the same amount of cash.

Imagine you have £10 in your pocket. A few years ago, that tenner might have been enough to buy you a couple of pizzas. But if inflation has caused the price of pizza to go up, your £10 might only be enough for one pizza now. That's inflation in action.

What causes inflation?

There are a few different factors that can contribute to inflation, such as:

• increased demand for goods and services
• rising production costs (like raw materials or wages)
• changes in government policies (like printing more money)

When demand for products goes up, businesses might raise their prices to keep up with the increased demand. And if production costs go up, companies might pass those extra expenses on to shoppers.

How is inflation measured?

Economists use various methods to track inflation, but one of the most common is the Consumer Price Index (CPI). The CPI measures the average change in prices paid by shoppers for goods and services like food, housing and transportation.

The CPI is calculated by comparing the cost of a "basket" of commonly bought items from one month to the next. If the price of the basket goes up, that indicates inflation is happening.

What are the effects of inflation?

Inflation can have both a good and bad impact on the economy and your money. On the plus side, moderate inflation can be a sign of a growing economy. It can encourage spending and investment, as people might be more likely to buy things now before prices go up in the future.

But high levels of inflation can be problematic. If prices rise too quickly, it can be difficult for wages to keep up, leaving many people struggling to afford essentials. Inflation can also make it harder to save money, as the value of your savings may not grow as quickly as prices are rising.