Ritika Janiya
Inflation in the UK took an unexpected dip last month, falling to 1.7% in the year to September. This is the lowest rate in over three years, and it could mean a big change is on the way for interest rates. But what does that really mean for you and me?
Why Inflation Matters
Inflation is the rate at which prices for goods and services rise over time. When inflation is high, the cost of everyday things like food, petrol, and clothes goes up. For most of 2022, inflation was at an eye-watering 11%, making it tough for families to keep up with rising bills. The Bank of England (BoE) aims to keep inflation around 2%, but it had soared well beyond that.
This rise in prices was partly due to the war in Ukraine, which made energy more expensive. The Bank had to increase interest rates to stop people from spending too much and to try to slow down inflation.
But now, with inflation at just 1.7%, some good news could be on the way. The lower inflation rate means that prices are not rising as quickly, and this gives the Bank of England a chance to cut interest rates again.
Lower Airfares and Cheaper Fuel
The biggest reasons for the drop in inflation are lower airfares and cheaper petrol. Airfare prices often fall after the summer holiday season, but they dropped even more than expected this year. On top of that, petrol prices were down by 10.4% compared to a year ago. This helped bring the overall inflation rate down.
However, not everything is getting cheaper. Food prices are still rising, with milk, cheese, eggs, and soft drinks all seeing price hikes. This is the first time food inflation has gone up since March of last year. So while your fuel tank might cost less to fill, your weekly shopping bill could still be a headache.
Interest Rate Cuts on the Way?
The Bank of England had already cut interest rates in August and planned to hold off on making more changes for a while. But the drop in inflation has opened the door for another cut, possibly in November or December. Currently, UK interest rates are sitting at 5%.
Investment expert Danni Hewson from AJ Bell said a 0.25% cut in November seems almost certain now. There’s also a strong possibility of another cut in December. If this happens, it could be good news for people with loans or mortgages, as their repayments could get cheaper.
On the flip side, savers might not be too happy. With lower interest rates, the returns on savings accounts could shrink. So, while borrowing might get easier, saving could feel less rewarding.
What Does This Mean for You?
When the Bank of England changes interest rates, it affects everyone. If rates go down, borrowing money for things like mortgages, credit cards, or car loans becomes cheaper. This is great news for people who are already struggling with high bills and payments.
But lower interest rates also mean that savings accounts will offer less interest. People who rely on savings to make extra money might not be happy with this change. Additionally, when landlords pay less on their mortgages, they might pass those savings on by not raising rents as much.
Maria, a volunteer at a food pantry in Liverpool, shared how hard rising prices have made it for her to make ends meet. She uses the pantry to get groceries at a much lower price. For £3.50 a week, she receives about £25 worth of food, but even that isn’t enough to ease her financial burden.
“I’ve noticed the prices at the supermarket have gone up a lot,” Maria said. “Even with the pantry, I’ve got to prioritize things like food and heating over everything else.” Lower inflation is a good sign, but for people like Maria, the cost of living is still a struggle.
The Bigger Picture
The fall in inflation comes at a time when the UK government is also facing big decisions about its budget. Chancellor Rachel Reeves is working on a plan to cut government spending by £40 billion. This could mean cuts to important areas like welfare and public services, and she has warned that tough decisions will need to be made.
One area where the inflation drop might help is with benefits. Every year in September, the inflation rate is used to calculate how much certain benefits will rise by in April. For example, disability benefits and carer’s allowance are tied to inflation and will go up by at least 1.7% next year.
However, the state pension is expected to rise by 4.1%, thanks to a system known as the triple lock. This guarantees that pensions increase by the highest of three things: wage growth, inflation, or 2.5%. Because wages have risen, pensions will go up more than benefits, which could create a divide between retirees and those who rely on other forms of financial support.
What’s Next?
The big question now is whether the Bank of England will cut interest rates in both November and December. If inflation stays low, the answer is probably yes. However, some experts warn that inflation could rise again in the coming months, especially with energy prices going up.
Yael Selfin, chief economist at KPMG, believes the Bank will lower rates next month, but she also thinks inflation might climb again as household energy bills increase by around 10%.
For now, families like Maria’s will have to wait and see if the changes in interest rates and inflation will offer them any relief. But with energy prices still unpredictable and food costs rising, it’s clear that many people will continue to feel the squeeze for a while yet.
