Inflation fell to 3.6% for the first time in four months in October latest official figures reveal today in a pre-Budget boost for Rachel Reeves.
The headline measure of the rising cost of living -the Consumer Prices Index (CPI) - dipped after three consecutive months stuck at 3.8%. It is now at the lowest level since June.
The fall, which was slightly less than expected in the City, was in part driven than smaller increases in energy prices than a year ago, according to the Office for National Statistics (ONS). However, worryingly food inflation has started to accelerate again, rising from 4.5% to 4.9%.
City analysts had been expecting inflation to peak at around 4% in the early Autumn. Yields on British government bonds - or gits - fell sharply after the lower than expected September figure was announced but have started rising again in recent days after the Chancellor ruled out a markets pleasing 2p rise in the basic rate of income tax.
Although inflation is still well above the official target of 2%, today’s drop make a quarter point cut in interest rates from the Bank of England in a month’s time even more likely,
It comes just a week before Rachel Reeves’s long awaited Budget when she is expected to reveal a range of tax increases totalling as much as £30 billion a year.
Today the Chancellor said: “This fall in inflation is good news for households and businesses across the country, but I’m determined to do more to bring prices down. That’s why at the budget next week I will take the fair choices to deliver on the public’s priorities to cut NHS waiting lists, cut national debt and cut the cost of living.”
However, the increase in the rate of food inflation will be a concern for the Government after a fall in September. Staples that are rising particularly rapidly in price include beef and veal, up 27% year on year, whole milk (15.5%), butter (14.3%), chocolate (17.5%) and coffee (14.2%).
ONS chief economist Grant Fitzner said: “Inflation eased in October, driven mainly by gas and electricity prices, which increased less than this time last year following changes in the Ofgem energy price cap.
“The costs of hotels was also a downward driver, with prices falling this month. These were only partially offset by rising food prices, following the dip seen in September.
“The annual cost of raw materials for businesses continued to increase, while factory gate prices also rose.”
Lindsay James, investment strategist at City investment firm Quilter, said: “Energy and restaurant and hotel costs helped to lower the headline rate but food inflation actually ticked up unexpectedly.
“Although the direction of travel is improving, the wider economic backdrop remains fragile. Growth has been subdued all year, and the labour market is now cooling at a faster pace. The economy is clearly at a point of significant risk as we move towards 2026. With quarter on quarter growth successively weakening through 2025, incoming significant tax hikes on both corporates and individuals could snuff out remaining limited optimism.
“Amidst rising unemployment , ill thought-out plans to target the tax relief on offer from salary sacrifice pensions not only store up greater problems for the future but also make workers even more expensive for companies who have already been hit hard by hikes to National Insurance and the minimum wage. “
Muniya Barua, deputy chief executive at London business group BusinessLDN, said: “Easing inflation will offer a degree of relief for firms but what businesses really need is for the Chancellor to put an end to damaging uncertainty by delivering a Budget that backs growth.
“With many firms pausing investment decisions until after the Budget, it’s vital that any tax increases announced next week do not hit already fragile business confidence.
“The Government should instead help unlock London’s full growth potential by backing infrastructure projects that can crowd in investment in housing, cutting stamp duty on share transactions to put the UK on a par with other financial centres, and abandoning plans for a new levy on international students that will harm the UK’s global competitiveness.”
