The headline rate of UK inflation for September came in lower than expected at 1.7%, according to figures released by the Office for National Statistics today.
This was below the 1.9% rate consensus forecast and takes the Consumer Price Index below the official Bank of England target of 2%. In July and August the rate of inflation was 2.2%, so September’s reading is a significant month-on-month change. With no October Bank of England interest rate decision, the latest inflation data is likely to increase the expectations of a 25 basis point cut at the Nov. 7 meeting.
Core inflation, which excludes energy, food, alcohol and tobacco, also fell by more than forecast to 3.2%, against FactSet forecasts of a 3.4% rate, and below August’s 3.6% reading. Contributing to weaker inflation were transport, plane fares and petrol, while food and non-alcoholic drinks prices rose.
September's inflation data is key for setting state benefits. Under the "triple lock", state pensions will rise by earnings growth because it's higher than inflation at 4.1%. This takes the single state pension to nearly £12,000 from April 2025.
ING economists argue that the fall in annual services inflation—to below 5% for the first time since May 2022—is more significant for the Bank than the headline rate.
"Remember this is, by some distance, the most important input into the BoE's decision-making process, as it tries to gauge the level of inflation 'persistence' in the economy," says ING developed markets economist James Smith.
"We think the Bank of England can pick up the pace of cuts beyond November. We expect a cut in December and at every meeting until rates reach 3.25% next summer," he adds.
Can the Bank of England Cut Faster?
What does this mean for interest rates? Rates were held at 5% in the most recent Bank meeting on Sep. 19, where the central bank maintained its cautious messaging about inflation persistence.
Morningstar European market strategist Michael Field says: "Today’s headline inflation reading would suggest that the risk in meeting the Bank of England’s targeted level of inflation is, in fact, to the downside. This is a revelation that gives the bank even further scope to cut interest rates.”
Guy Foster, chief strategist at RBC Brewin Dolphin, argues that the inflation fall "probably means increasing the cadence of interest rate cuts" rather than a 50 basis point cut, as seen in the US in September.
In September Bank said that monetary policy "will need to continue to remain restrictive for sufficiently long" to keep inflation at bay. Since then the Bank governor Andrew Bailey has said that there is scope to be "more aggressive" with rate cuts in upcoming meetings. UK interest rates were cut from 5.25% to 5% in August 2024, the first reduction in interest rates for four years.
JP Morgan's global market strategist Aaron Hussein is more cautious, arguing that wage growth and the tight labour market mean too-rapid rate cuts could revive inflation.
"While a November cut seems highly likely, this cutting cycle is still set to be gradual absent a shock to growth. A quarterly cadence of cuts appears most likely. Investors expecting the Bank to keep pace with its peers around the world are therefore likely to be disappointed."
In August the Bank published its quarterly monetary policy report, which has projections for longer-term inflation. In all of the Bank's 2025 inflation forecasts, CPI remains above the 2% target in a year's time, before falling below target in 2026.
"There continues to be uncertainty about the medium-term pathway of CPI, particularly as the UK's labour market is still tight by historical standards, so it remains to be seen whether we are on the verge of returning to a sanguine inflation environment," says Handelsbanken UK economist Daniel Mahoney.
Wider Inflation Trends Are Clear
In terms of overall inflation trends, UK inflation peaked above 11% in 2022 and has fallen sharply since. Bank of England interest rates rose from 0.1% in December 2021 to 5.25% in August 2023. Global central banks have been cutting interest rates this year as inflation falls, with the US Federal Reserve, European Central Bank and the Bank of England all making downward adjustments. Inflation in the eurozone is falling faster than expected, teeing up a likely interest rate cut on Oct. 17.
Today's news will also help shape the new government's first Budget on Oct. 30. Chancellor Rachel Reeves has spent some time preparing the country for economic pain and tax rises, but this is undoubtedly a good piece of news that will contribute to the optimism she will also rely on in her first speech.
