Inflation slowed to 1.7 per cent in the twelve months to September, taking the inflation rate to its lowest levels since spring 2021. While markets and forecasters had expected the inflation rate to drop below the Bank of England’s 2 per cent target at some point this year (market consensus for September was 1.9 per cent), the bigger-than-expected fall has come as a surprise, as core inflation also slowed to 3.2 per cent in the 12 months to September – down from 3.6 per cent in August. The largest contributions to the slowdown came from falling transport costs, while overall services fell to 4.9 per cent on the year, down from 5.6 per cent in August.
‘It will be welcome news for millions of families that inflation is below 2 per cent’ the chief secretary to the Treasury Darren Jones said of the news this morning. It certainly will be, but it is unlikely to stay there. The BoE has been suggesting in its reports for months now that it expected the inflation rate to fall to target – or just under – before rising to something close to 3 per cent by the end of the year.
That rise is nothing compared to what the country has been through these past few years, which amounted to a full-blown inflation crisis. But it’s still a rise above target, and the Bank isn’t getting complacent. After implementing its first rate cut since the crisis in August, taking the bank rate down to 5 per cent, the Monetary Policy Committee voted 8-1 to hold rates in September, recommitting to a slow and steady process of bringing down interest rates, rather than a more hurried one.
From this perspective, today’s inflation news isn’t game-changing for the government or the Treasury, which is preparing for its first Budget in just under two weeks’ time, as the Bank has already been clear about how quickly (or rather, slowly) it plans to move on rates. That said, today’s news does confirm that the Bank has the scope to implement its second rate cut at its next meeting in November: a move that has been expected by markets, but could be pushed to December, if there were growing evidence of secondary inflationary pressures.
But between today’s inflation news and yesterday’s labour market data, which slowed average weekly wage growth slowing to 4.9 per cent in the three months to August (its slowest pace in over two years) the Bank is more likely to push ahead with a rate cut. It’s unlikely to be the ‘aggressive’ push the Bank’s governor curiously called for a few weeks back, but the trajectory is likely to provide some relief, nonetheless.
There is one, potentially large, benefit here for a Chancellor who has to find tens of billions of pounds in her first Budget just to service the debt. Not only will the prospect of lower borrowing costs in the future make her Budget slightly easier to balance, but crucially the signal rate cuts give to the markets will help her sell her plan to further loosen the fiscal rule, to allow for more borrowing for capital spending.
As I noted on Coffee House last week, it’s not an easy sell. Gilt yields have been drifting upwards since speculation began that Reeves’s plan involved more borrowing. Even by preparing the markets for the change, investors will still need to be convinced her plans to borrow are both credible and sustainable. Any indication that rates are on their way down will help the Chancellor, bit by bit, to more convincingly make her case.