UK inflation falls to 3.6%, lowest level in four months, as Budget looms

UK inflation fell to 3.6% during the year to October – its lowest level in four months – thanks to slower increases in household energy costs and falling hotel prices.

However, food inflation rose again after a brief decline, underscoring the continuing pressure on household finances just one week before the government delivers its much-anticipated budget.

The latest figures from the Office for National Statistics (ONS) show inflation fell from 3.8% in September, although the decline was not as sharp as economists had expected. The cut raises hopes that price pressures have peaked and could pave the way for future interest rate cuts, even as inflation remains above the Bank of England’s 2% target.

Chancellor Rachel Reeves said she remained “determined to do more to bring prices down”, acknowledging that the cost of living “remains a significant burden on families across the country”. Reeves is expected to make easing cost pressures a major theme of the budget, which is likely to include a mix of tax increases and spending cuts to stabilize public finances.

The biggest upward pressure in October came from food and non-alcoholic beverages, with food price inflation rising to 4.9%, compared to 4.5% the previous month. The prices of bread, meat, fish, vegetables, chocolate and sweets rose, although fruit became slightly cheaper.

The Food and Drink Federation said rising ingredient and energy costs and “regulatory burdens” – including packaging duties and higher National Insurance – continued to push up prices across the sector.

Grant Fitzner, chief economist at the ONS, said the main factor driving the headline rate lower was the much smaller rise in household energy bills compared to last year. Ofgem’s maximum rates rose just 2% in October, compared to a 9.6% rise in 2023.

Hotel prices also fell between the summer and winter period – a typical seasonal trend – but fell more sharply this year, leading to lower inflation. However, fuel prices rose again, increasing transportation and delivery costs.

Inflation within the supply chain remained high, with raw material costs and factory gate prices continuing to rise.

The Bank of England kept interest rates at 4% earlier this month after inflation remained stubbornly high over the summer. But analysts now believe that easing price pressures may prompt the bank to cut interest rates at its meeting scheduled on December 18.

Rob Wood, chief UK economist at Pantheon Macroeconomics, said the December cut was now “locked in”, although he expected a long gap before the next cut.

Core inflation also improved: core inflation (which excludes food and energy) and services inflation both fell in October – signs the Bank of England will view positively as it assesses the pace of future price rises.

The inflation figures have heightened the political debate as the government prepares its first budget. Reeves is said to be considering measures such as cutting taxes on energy bills or introducing contractionary adjustments to spending to support the wider fight against inflation.

Shadow chancellor Sir Mel Stride said inflation had been “above target every month since Labour’s last Budget”, leaving households “worse off”.

Liberal Democrat deputy leader Daisy Cooper urged the chancellor to “look this little horse in the mouth” and provide emergency support, including a VAT cut for the hospitality sector and immediate cuts to energy bills.

Lower inflation, if it persists, would reduce pressures on mortgage holders and borrowers more broadly.
Sarah Coles, head of personal finance at Hargreaves Lansdowne, said the country was “breathing a sigh of relief”, but warned that households were “far from out of the woods”.