UK inflation has dropped to its lowest level since April 2021, slipping below the Bank of England’s 2% target for the first time in years.
The latest data from the Office for National Statistics (ONS) shows annual inflation at 1.7% in September, down from 2.2% in August, a figure far lower than City analysts’ predictions of 1.9%. The Bank of England had forecast a more modest decrease to 2.1%.
The fall was largely driven by lower airfares and fuel prices, though this was partially offset by rising costs for food and non-alcoholic beverages, which saw their first increase since March 2023, climbing from 1.3% to 1.8%. This uptick in food prices, while notable, is far below the peak of nearly 20% in March.
Financial markets reacted quickly to the inflation news. Sterling dropped 0.62% against the US dollar, falling below $1.30, while it lost 0.49% against the euro, dipping to €1.194. In the bond market, the yield on the 10-year UK government bond fell by 1.8% to 4.1%, with the yield on two-year bonds dropping 2.5% to 4.03%, as expectations of interest rate cuts grew.
Darren Jones, Chief Secretary to the Treasury, welcomed the news but remained cautious: “It will be welcome news for millions of families that inflation is below 2 per cent. However, there is still more to do to protect working people, which is why we are focused on bringing back growth and restoring economic stability.”
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