UK inflation has dropped to 1.7% in September, its lowest level in three and a half years, according to the Office for National Statistics. The consumer prices index fell sharply from 2.2% in August, driven by lower air fares and petrol prices, surprising financial markets that had expected a smaller decline.
This marks the first time headline inflation has fallen below the Bank of England's 2% target since April 2021, providing a pre-budget boost to Chancellor Rachel Reeves. Reeves has said the upcoming budget will focus on protecting household incomes, repairing public services, and fixing the economy's foundations through infrastructure investment.
The pound fell against the US dollar and euro, while UK government borrowing costs dropped in anticipation of potential interest rate cuts. Economists expect the Bank of England to reduce rates by a quarter of a percentage point to 4.75% in November, though the budget's impact on inflation will be a key factor.
Darren Jones, chief secretary to the Treasury, welcomed the news but cautioned that more work is needed to protect working people. Meanwhile, the Resolution Foundation noted that the fall in inflation is 'badly timed' for millions of households, as September's reading is used to set benefit increases, meaning lower rises next spring.
The state pension, however, will rise by 4.1% due to the triple lock. The government is estimated to save around £500 million on welfare bills, though this may be short-lived. Reeves has warned of a £22 billion hole in public finances and is reportedly considering tax rises and spending cuts worth £40 billion in the budget.
