UK inflation slides to three-year low

Headline figure below 2% target and softer-than-expected core inflation could pave the way to decisive post-Budget interest rate cuts.

16 October 2024

Some good news for the UK at last, with inflation falling below the Bank of England’s (BoE) 2% target after more than three years of remaining stubbornly above it.

Headline inflation was up 1.7% on the previous year, firmly below the previous reading’s 2.2% rate. This was below both the BoE’s and economists’ consensus expectations. Lower air tickets, petrol prices and services costs all contributed to the easing trend. Even stripping out energy, food, alcohol and tobacco, core inflation also came in lower than the expected 3.5%, at 3.2%.

The focus now turns to the Bank’s rate-setting committee which next meets in early November and the hope will be that they can cut rates more aggressively to support the ailing economy which, according to Bloomberg, is expected to grow by just 1.3% in 2025. The need for fast and decisive rate cuts in such circumstances cannot be emphasised enough given wide predictions of a particularly tough Budget later this month which has been dampening consumer confidence and business sentiment for several weeks already.

Chancellor Rachel Reeves is now talking about a fully GBP 40 billion funding gap (up from the previous GBP 22 billion) which will need to be addressed through aggressive tax rises in order to protect key government departments from spending cuts in real terms. So while it is true that the drag down from energy prices will dissipate into the autumn and winter months, the latest inflation figures offer the UK a fairly clear pathway to easier monetary policy. Price pressures really do seem to be easing at last, and the timing could not be more fortuitous.