UK inflation drops to 3.6% in pre-Budget boost to consumers and Rachel Reeves

Inflation fell to 3.6 per cent in October, in a pre-Budget boost to Rachel Reeves – as well as to consumers and businesses.

The latest update from the Office for National Statistics (ONS) showed Consumer Prices Index (CPI) inflation dropping from September, when it surprisingly held at 3.8 per cent. That has led to most analysts to declare inflation has peaked across the UK.

It is the first time the rate of inflation has been at this level since June of this year – though just three months prior to that, in March it was as low as 2.6 per cent.

Some economists were expecting CPI to fall to as low as 3.5 per cent last month, and while that has not quite transpired, the downturn in price growth will be cause for relief for households and firms which have had to deal with constant price pressures and uncertainty this year.

The anticipated fall was “primarily based off last year’s big increase in energy prices dropping out of the annual comparison”, explained RSM UK’s chief economist Thomas Pugh, as well as continued slowdown in food price inflation.

It comes just a week before the chancellor, Rachel Reeves, presents the Budget in which it is expected a raft of tax increases will be unveiled.

The ONS have said that housing and household services made “the largest downward contribution” to the changing rate of CPI; while food and non-alcoholic beverages made the largest offsetting upward contribution.

Costs from health, communication and transport also dropped to contribute towards lowered inflation rates, while education and recreation and culture costs rose.

The continuing disinflation – plus recent data around rising joblessness – is likely to mean the Bank of England cut interest rates in December.

George Brown, senior economist at Schroders, said the situation beyond that remains cloudy and will depend very much on Rachel Reeves’ Budget. “Evidence inflation has peaked should tip the scales towards a December rate cut. But any further rate cuts will largely depend on the contents of the Chancellor’s red box. If VAT and green levies are eliminated from household energy bills, inflation could fall by as much as half a percentage point,” he said.

“But we remain concerned that broader price pressures will prove persistent. Wage growth is still well above a target-consistent pace, especially given repeatedly weak productivity.”

“Falling inflation is welcome news and provides some relief for households heading into the winter months,” said Raisin UK’s co-founder Kevin Mountford. “While borrowing costs remain high, stabilising price pressures may pave the way for lower interest rates in the future, which could make mortgages and loans more affordable over time.”

Those with cash sat in accounts earning interest below the rate of inflation were urged to move their money elsewhere by Derek Sprawling, head of money at Spring.

“A fall in inflation offers some relief, but I urge savers not to become complacent. Even with a lower rate, billions remain in accounts paying below inflation, which remains relatively high. Savers should take this opportunity to review their savings options and switch to accounts that deliver returns above inflation, ensuring their money continues to grow in real terms,” he explained.

“Furthermore, with the Budget due, the outlook for interest rates is volatile regardless of the inflation rate. Moving your rainy-day savings to an account that gives a better return without restricting access provides better returns now and flexibility in the future.”

“There remains a significant gap between the best and worst rates available, so ensuring you’re regularly reviewing your interest rate and switching where possible is key,” added Shawbrook Bank’s Sally Conway.