ONS says consumer price index fell to 2.4% last month from 2.7% in August

This article is more than 1 year old

This article is more than 1 year old

UK inflation dropped further than expected last month as the falling price of meat and chocolate helped reduce some of the pressure on cash-strapped British consumers.

The Office for National Statistics (ONS) said the consumer price index (CPI) fell to 2.4% in September from 2.7% the previous month, confounding City analysts’ forecasts for a more modest reduction to 2.6%.

Combined with the pay growth figures for British workers, which showed average weekly earnings rising at the fastest rate in almost a decade, the latest snapshot for UK inflation suggests pressure on households is beginning to fade two years on from the EU referendum.

Inflation increased to the highest levels in five years after the Brexit vote triggered a drop in the value of the pound, which pushed up the cost of importing food and fuel to Britain. Although this impact has started to recede, household incomes have been badly squeezed over the past two years, with families losing more than £900 each as a consequence.

The latest figures are likely to dissuade the Bank of England from raising interest rates before Britain formally leaves the EU in five months’ time as it suggests inflation is gradually returning to the 2% target set for the central bank without the need for higher borrowing costs.

The National Institute of Economic and Social Research said it forecasts inflation will return to the Bank’s target over the next 12 months.

Economists said this removed some of the impetus for Threadneedle Street to lift the cost of borrowing after it raised interest rates to 0.75% in August. Sterling fell on the foreign exchanges against the dollar by about 0.4% to $1.31.

Mike Jakeman, senior economist at the accountancy firm PwC, said: “On balance we expect the central bank to maintain its current monetary policy stance until there is greater clarity over the circumstances of the UK’s withdrawal from the EU. This position is likely to be assisted by a further cooling of inflation.”

The ONS said the largest downward contribution to inflation, which measures the rising cost of living, was thanks to food and non-alcoholic drink prices dropping by 0.1% between August and September. Meat and chocolate prices provided most of the downward contribution.

Ferry prices also fell from a surprisingly high summer peak, while the cost of going to the theatre dropped compared with an increase a year ago.

Despite inflation easing across almost every sector of the economy analysed by the ONS, some prices continued to climb last month, including gas and electricity bills.

Drivers were hit with a 1.7p-per-litre increase in the price of petrol last month as global oil prices hit their highest levels since 2014 amid growing concerns over supply constraints triggered by US sanctions on Iran. The increase was, however, less than a 2.5p-per-litre rise in the same month a year ago.

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The latest inflation figures also give the government the final piece of information required for uprating pensions and benefits from next spring, which is based on the September reading for CPI.

Barring any changes by Philip Hammond in his the budget, household benefits will not increase in line with inflation because of the benefits freeze. The Resolution Foundation thinktank estimates a lower-income family with children will be £200 worse off next year as a consequence.

UK pay growth rises to 3.1%, the highest in almost a decade Read more

Adam Corlett, senior economic analyst at the Resolution Foundation, said: “While falling inflation is good news for real pay growth, today’s figures also confirm a blow to low-income families’ living standards by setting out the scale of squeeze on their benefits.”

Frances O’Grady, general secretary of the TUC, said: “If Theresa May is serious about her claim that austerity is over then the government must reverse unfair cuts to working-age benefits.”

Pensions are, however, in line for an inflation-beating increase in payouts because of the government’s pensions triple lock, which guarantees the state pension increases each spring by whichever is highest from the September CPI, average pay growth for the month of July or 2.5%.

Earnings growth was 2.6% in July, meaning that pensions will rise by that amount from April.