Ritika Janiya
Britain has some good news: inflation is falling. For the first time in years, the rate of inflation fell to 1.7% in September from 2.2% in August, ending a long spell of annual upward momentum. This is the first time inflation has been that low since 2021, and these new possibilities about the country’s economy are opening up with this development.
This reduction means the Bank of England will have no alternative but to reduce the interest rates, a welcome news for the government and its people. The report promises to bring in new fortunes for Labour’s Rachel Reeves as she takes over to steer the country’s finances.
This will give her an opportunity to free borrow money and invest in various types of activities without panicking financial markets.
Why is Lower Inflation a Big Deal?
This is also termed inflation when most things are costing more money over time due to an increase in prices. Everything is becoming expensive-food, clothes, services. The UK had battled high inflation for months, but the falling rate now could help make things cheaper.
Lower inflation is also in favor of the government. With stable inflation, it is easier for the Office for Budget Responsibility (OBR) to calculate how much money the government needs to spend on welfare schemes. In fact, the drop in the inflation rate will save billions of pounds for the government on welfare payments next year.
But that’s not all. A lot is also paid in terms of paying back its debts by the government. With falling inflation, the OBR may scale down how much it expects the government to pay on its interest payments. This is significant because just repaying debt, in the 2023-24 financial year, cost the government more than £100 billion. Cutting that figure frees room for other things.
What Does All This Mean for You?
For the ordinary person, lower inflation has meant that money stretches further. Once the price movement stabilizes, groceries, fuel, and utility bills ‘gorge’ as much of one’s budget as they did previously. If interest rates come down too, it can mean that borrowing money or getting a loan or mortgage might be cheaper.
It is like a breath of fresh air for Rachel Reeves and the Labour government, which keeps its fingers crossed for falling interest rates. In case borrowing costs fall, Reeves will be able to borrow money at cheaper rates to finance some things like infrastructure-that is, roads, hospitals, and schools-without causing alarm bells in the financial markets.
Will Interest Rates Fall?
Before the latest inflation report, most investors believed that the Bank of England would lower interest rates by a quarter of a percentage point to 4.75% next month. However, after seeing inflation reduce, almost everyone is now convinced that this rate cut will come across. Some experts even think that interest rates may fall faster in the coming new year. According to Andrew Bailey, Bank of England Governor, it like they are hinting towards the possibility that maybe they’d need to cut the rates even more aggressively if the inflation continues to drop.
Lower interest rates would mean that borrowing money by people and a firm’s investments would become cheap. This could give the economy an impetus, with wages slowing down and fewer jobs added on.
What is Going on in the Global Economy Matters Too
While the UK has seen somewhat lower inflation, the world economy is facing some very different challenges. Recently, oil prices have been falling- mostly due to slower economic growth in China, the world’s biggest consumer of oil. A slowdown in the growth rate of the economy of China, caused by a severe housing market crisis, affects global markets. The economic boom in the US is also starting to wind down at the same time.
Added to this is the lower demand from both China and the US, and adds to the weight on the economy in Europe. All these global factors mean that what happens in other parts of the world also has an effect on the decisions the UK’s Monetary Policy Committee makes over setting interest rates. The slowdown in global demand increases the possibility that UK interest rates will fall faster than was initially thought.
What About Food Price Inflation?
Now, that’s one worrying aspect because food prices are rising, whereas general inflation has dropped. In general, when the fuel and transportation costs decrease, the food prices usually drop in response, but so far, that hasn’t happened, and it’s something that the Bank of England is keeping its eye on pretty closely.
A core rate of inflation-excluding everything from energy to food-is still at 3.2%. That has led some to believe there are little inefficiencies within the broader economy contributing to higher inflation-particularly around food. But as wage growth slows, that pressure in the other direction may continue to ease.
What’s Next for Rachel Reeves?
For Labour chancellor Rachel Reeves, inflation fall is a celebration within her circle of flexibility. She has grand plans to use it to spend on the country’s infrastructure, making up for years of low public investment under Conservative government. Fall in inflation and possible interest rate implies that she can borrow more cheaply to fund these projects.
However, she has to be cautious. For all the brightening in the country’s economic outlook, the global economy is still battered on all sides-by the China situation, by the Ukraine war, and even beyond. That may make it pretty confusing in the years to come.
