Inflation falls unexpectedly – consumer credit industry reaction

Inflation fell unexpectedly to 1.7 per cent in the year to September, the lowest rate in three-and-a-half years, according to the latest Office for National Statistics (ONS). 

However, households were hit by a jump in food and non-alcoholic drink inflation, with stronger price increases for milk, cheese, eggs and fruit. Lower airfares and petrol prices were also the main drivers behind the surprise slowdown.

Lower inflation in September was. driven by a very sharp fall in transport prices, reflecting drops in airfares and petrol prices – means that CPI inflation has fallen below the 2 per cent target for the first time since April 2021. However, the fall is not expected to last, with inflation set to rise by around 0.5 percentage point next month as previous falls in energy prices drop out of the 12-month inflation calculation.

With the CPI inflation figure for September used to uprate working-age benefits in the following financial year, the Resolution Foundation finds that a typical low-income family with two children in receipt of Universal Credit is set to see their annual UC award rise by £253 next April.

If working-age benefits were to be uprated in line with October inflation, including the 0.5 percentage point increase driven by energy prices (so that CPI inflation was 2.2 per cent), the same family would see their UC award rise by £327 instead (a cash gain of £74).

The Foundation adds that pensioners are less affected by this temporary inflation dip as the State Pension will be raised in line with total average weekly earnings growth (May-July) of 4.1 per cent. The Basic State Pension is due to rise by £362 to £9,201. This means that pensioner benefits are on track to rise over twice as fast as working-age benefits next year.

Lalitha Try, Economist at the Resolution Foundation, said “There was a larger-than-expected fall in inflation last month, but it will rise sharply in October driven by base effects from energy prices. This temporary fall is badly timed for millions of low-to-middle income families as will result in a lower increase in their benefits next year.

“A more timely measure of benefit uprating would deliver a cash gain to a low-income family with kids of around £74 next year. The Government needs to address the age divide in benefits which has left working-age support fall further behind rising wages and living standards.”

Steve Vaid, Chief Executive of the Money Advice Trust, the charity that runs National Debtline, said “Inflation is lower, but millions of households continue to struggle and many are facing unaffordable debts due to the cost of living crisis.  

“It’s vital households experiencing financial difficulty are not left behind. The Government needs to seize the chance in the upcoming Budget to help those most in need of support. This should include help for people to repay unmanageable energy debts, and ensuring Universal Credit provides enough support for people on low incomes.”

Paul Noble, CEO of Chetwood Bank, said “Inflation falling under 2% for the first time since April 2021 is welcome news for consumers. Not only does it allow for further respite from rising prices, but it also increases the likelihood that the Bank of England will cut the base rate again when it next meets on 7th November.

“If the base rate is cut next month, this will likely result in greater confidence and activity across the property market, with a reduced cost of borrowing increasing demand from prospective buyers. However, while these are important economic shifts, the other unknown is the exact contents of the Chancellor’s Budget, which is being delivered on 30th October.

“What we can say is that, with the macroeconomic climate changing and a raft of new policies expected in the Budget, it will be important for consumers and investors to take stock of their finances over the coming months. As a bank, our responsibility is to support customers through this period, ensuring our products cater to people’s evolving needs and supporting borrowers and savers to act with confidence.”

Simon Webb, Managing Director of Capital Markets at LiveMore, said “The decline in inflation by 0.5%  to 1.7% in the 12 months to September 2024, could suggest that inflationary pressures are easing, which can lead to stabilised living costs. For older homeowners and prospective buyers, this relief may improve affordability and financial security, enabling them to make more confident purchasing decisions.

“A lower CPIH could influence the government’s fiscal strategy in the upcoming budget, potentially allowing for targeted investments that support homeownership among older adults. Such investments might include tailored initiatives to assist older buyers in accessing affordable mortgage products or incentives for those looking to downsize, ensuring they can effectively navigate their housing needs as they age.

“As the housing market adapts, it remains essential for older buyers to stay informed about mortgage options. Access to comparison tools such as LiveMore’s Mortgage Matcher and financial guidance will empower them to align their mortgage choices with their long-term financial goals, ensuring they can thrive in a more stable economic environment.”

Richard Carter, CEO of Lenvi said “Inflation unexpectedly falling to 1.7% in the year to September, the lowest rate in three-and-a-half years, represents a major milestone for the Bank of England and for consumers, who will have been put off making big purchases like cars or buying a house in recent months. Our latest data on borrowing habits found that four in five Brits were likely to switch their mortgage deal this year, compared to three in five in 2022. Many of our customers will likely be anticipating increased mortgage activity, as inflation cuts point towards interest rate reduction next month and consumer confidence is slowly restored in the house-buying market.
 
“Consumers, including those looking to get a foot on the property ladder, will now be looking to the Autumn Budget at the end of the month, where things like Capital Gains Tax, first-time buyers and the Lifetime ISA are rumoured to be addressed. Our 150+ lending customers are preparing for this, and are acting fast to update their rates to stay competitive and ensure they are equipped to manage an increasing demand for loans, alongside supporting potentially vulnerable customers. Lenders will need to prepare to scale, compliantly, and to do this it’s vital that they have the correct processes and quality systems in place.”

Sarah Coles, Head of Personal Finance at Hargreaves Lansdown said “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. The yo-yo of inflation will bring a smile to people’s faces this month, but it’ll be more of a grimace in four weeks’ time. It’s a challenge for our budgets – but will make surprisingly little difference to the Bank of England – so savings and mortgage rates should keep getting slimmer as we move towards the end of the year.

“Inflation fell further than expected in September, hitting its target for the first time in three years. Price cuts at the petrol pumps have driven inflation lower, on the back of a drop in the oil price during the month.

“Air fares are also keeping prices at a lower altitude. These always fall between August and September, but this is an impressive step downwards – the fifth largest since these prices were first collected 23 years ago. It owes a lot to an unusually large bump in prices in August, as the washout of a summer drove more people to European destinations. It’s also being compared to a summer of cheaper travel a year earlier.

“Meanwhile, retailers have been busy cutting prices in an effort to persuade wary shoppers to part with their cash, despite their concerns about the future path of tax. Men’s and women’s fashions were particularly heavily discounted. Clothes prices still rose on the month, but much slower than a month earlier.

“Mortgage borrowers on tracker rates have waited a long time for more good news, but November should finally deliver a cut in their monthly costs. For those looking for a new fixed rate, or with a remortgage looming, there’s better news too, because mortgage rates are already lower. Cuts have been priced in, so Moneyfacts puts the average 2-year fix at 5.37% – down from 6.36% a year earlier.”