UK inflation plummeted to 1.7 per cent in September – but what does this mean for your finances?
With the rate of inflation falling below the Bank of England’s two per cent target for the first time since April 2021, many Britons will be wondering what this means for them.
This significant drop from August’s 2.2 per cent has been primarily driven by steep declines in transport costs, with lower airfares and fuel prices at the pump. Core inflation, which excludes volatile items like food and energy, also eased to 3.2 per cent from 3.6 per cent in August.
The unexpected fall in inflation is likely to increase pressure on the Bank of England to consider lowering interest rates at its upcoming November meeting.
While this development may offer some relief to Britons grappling with the cost-of-living crisis, experts caution that inflation could tick upwards in the final months of the year due to recent increases in energy prices.
What does lower inflation mean for:
Households
The lower inflation rate brings some comfort to consumers, who may now enjoy slightly more financial flexibility. Alice Haine, personal finance analyst at Bestinvest stated that “almost three years of rapid prices rises have left their mark on household budgets and many are still trying to balance the books as their finances slowly recover from the high borrowing and living costs seen at the height of the cost-of-living squeeze”.
Households are warned “brace yourself, because you’re going to need to tighten your belt again next month”
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While the current figures appear positive, Haine warns that inflation is expected to increase in the coming months due to the recent 10 per cent rise in the Ofgem Energy Price Cap on October 1.
Sarah Coles, head of personal finance at Hargreaves Lansdown, echoes this sentiment, stating: “The squeeze has eased, and we have room to breathe. But brace yourself, because you’re going to need to tighten your belt again next month.”
However, the rate-setting Monetary Policy Committee is likely to consider other data points aside from the headline inflation rate when they deliver their next interest rate decision on November 7.
These include the cooling jobs market, with wage growth and vacancy levels both continuing to ease, along with slowing economic growth figures in recent months compared to the first half of the year.
Despite these cautionary notes, the overall trend suggests a gradual easing of the cost-of-living crisis that peaked in October 2022, when inflation hit 11.1 per cent.
Mortgages
The drop in inflation could have significant implications for mortgages. Haine suggested that “lower inflation combined with slightly more competitive mortgage rates and product choice means affordability levels are improving for buyers”.
Average mortgage rates for two and five-year fixed-rate deals reached their lowest level since May 2023 between early September and October.
However, some lenders have recently increased rates due to concerns about Labour’s potential budget and Middle East tensions.
Coles explained that mortgage borrowers on tracker rates may see a cut in their monthly costs in November. She said: “For those looking for a new fixed rate, or with a remortgage looming, there’s better news too, because mortgage rates are already lower.”
Despite these positive trends, Haine warns that 1.4 million borrowers emerging from fixed-rate mortgages in the next year still face an average monthly repayment increase of £150.
Savings
For savers, the impact of lower inflation is mixed. Mark Hicks, head of active savings at Hargreaves Lansdown, warned that “more bad news is on the way” for savers.
Easy access savings rates have been falling, with five per cent rates becoming increasingly rare. Fixed-rate markets have also priced in potential rate cuts, with the best two-year deals now closer to 4.5 per cent.
However, Haine pointed out that “the best savings rates are continuing to outstrip inflation, giving savers who hunted out the top deals a healthy real return on their nest eggs”. She advised locking in top rates before they disappear.
Haine also suggested considering tax-efficient strategies, such as ISAs and pensions, especially with the upcoming Budget. She explained that savers are “loading up tax-efficient savings accounts… at a rapid pace” in anticipation of potential tax changes.
While the drop in inflation offers temporary relief for households, experts caution against premature celebration. The potential for inflation to rise again in the coming months, coupled with the Bank of England’s likely consideration of interest rate cuts, creates a complex financial environment.
For mortgage holders, this could mean more affordable repayments, but those coming off fixed-rate deals still face challenges. Savers, meanwhile, may need to act quickly to secure the best rates before they potentially decline further.
As the UK approaches the end of 2024, individuals are advised to review their financial strategies, considering tax-efficient savings options and seeking professional advice where necessary.
