Inflation has fallen once more, which, given that the country isn’t obviously heading for a recession, is good news. The Consumer Prices Index (CPI) rose by 1.7 per cent in the 12 months to September 2024, compared with 2.2 per cent in the year to August. So prices are still rising, but the latest figure is way down from the peak annual CPI rate of 11.1 per cent recorded in October 2022.
In part, the drop has been due to the diminishing impact of the invasion of Ukraine and the Covid pandemic on food prices and energy bills – they’re no longer doubling every year or two. The effects of the pandemic and the energy crisis are wearing off, but the particular factors at the moment are actually cheaper petrol and diesel, and lower airfares, though these are offset by higher food costs.
The drop in inflation isn’t quite as encouraging as it looks, though, because “core” inflation, which strips out volatile items, is not down by as much. That’s the measure the Bank of England pays most attention to. The reduction in inflation means that the Bank of England will feel more relaxed about reducing interest rates in the coming months – a help to mortgage holders and businesses at a time when market rates have been edging higher.
A reduction in interest rates can help a government burnish its reputation, indicating economic competence and stability. Lower inflation and interest rates also mean that the benefits bill and the cost of servicing the national debt will ease. The drop in inflation to 1.7 per cent for September is used to calculate universal credit payments.
Any major geopolitical crisis tends to panic the markets, push commodity prices (energy and food) higher, and feed inflation. Provided the fiscal stance is sustainable and consistent with bearing down on inflation and a gently downward trend in rates, the chancellor can proceed as planned. Lower interest rates and easier mortgages in 2025 are virtually guaranteed with the speculated tax hikes and public spending cuts.
While wage growth and employment prospects remain relatively encouraging, price rises moderate, and mortgage bills come down, these will offset some of the immediate pain inflicted by the Budget. Reeves might even offer some targeted tax cuts and benefit increases in the run-up to the next election in 2028 or 2029.
Jeremy Hunt, now the shadow chancellor, cheekily tweeted: “Worst economic inheritance since WWII? Of course.” Economic policies pursued helped halve inflation from its peak, underpin the Bank’s interest rate strategy, and get inflation back under control. A new leader of the opposition and a new shadow chancellor may bring a more radical change in direction.
Kemi Badenoch hinted at wanting to demote the roles of the OBR and the Bank of England, giving back the power to set interest rates and make economic predictions to the politicians. These factors will play a significant role in shaping the economic landscape in the upcoming years.