UK inflation has just fallen to 6.7%, despite expectations that it was going to rise again.
This inflation rate – a measure of how much goods and services have increased in price over the last 12 months – does not mean prices are falling, but just that they are climbing at a slower rate than before.
Still, these latest figures are far better than expected. So what happened?
Why did experts think inflation would rise?
Before the Office for National Statistics (ONS) revealed the UK inflation rate, it was expected to go up again.
Chancellor Jeremy Hunt told the BBC earlier this month that the government was expecting to see a “blip in September” in the inflation rate following months of a gradual decline in the overall rate.
Economists thought it would go up to 7% or 7.1%, having been at the 15-month low of 6.8% in August.
However, despite this prediction, the chancellor suggested inflation would still fall back to 5% by the end of the year.
The Bank of England’s governor Andrew Bailey and economists were expecting a similar result.
After all, fuel prices have risen, due to a spike in the value of crude oil, and they remain much higher than before Covid due to the war in Ukraine.
There were also some increases in duty on on alcohol.
Both of these factors were expected to outweigh lower food and goods prices elsewhere.
But, Sky News’ economics and data editor, Ed Conway, suggested “this is the biggest undershoot versus expectations that we’ve seen since the beginning of the cost of living crisis”.
In fact, even if you remove the volatile prices like food and fuel, the economists predicted core inflation to go to 6.8%. This rate actually fell to 6.2%.
Why did inflation actually fall?
If you include all factors like food and fuel, inflation has actually fallen from just 6.8% to 6.7%.
That’s still noteworthy, as it means the UK is getting closer to its target inflation rate of 2% again.
But, it’s confusing. Fuel inflation is actually going up, although prices are going down because of the way numbers are compared between years.
ONS’s chief economist Grant Fitzner told the Today programme that the decline in inflation was driven by restaurants and hotels (driven by cheaper overnight accommodation), as well as a decline in food and non-alcoholic beverages, and a small (unusual) fall in August’s airfares.
What does that mean for the UK as a whole?
Chancellor Jeremy Hunt said that it shows the plan is “working” but notes that inflation is “still too high”.
Prices are still rising faster in the UK than in France, Germany or the US – and it’s on track for the highest rate in the G7.
The government is aiming to get inflation to 5% by the end of the year, as Rishi Sunak vowed in January to halve the rate.
But Labour’s shadow chief secretary for the Treasury, Darren Jones, said the decline in inflation is still “nowhere near” enough to help families.
Prices are also rising in the crude oil market meaning petrol pumps will get more expensive, while the IMF has also shown how energy shocks rocked 1970s UK.
It does mean that an interest rate rise is therefore less likely, though – and that’s very good news, because interest rates are currently at a staggeringly high rate of 5.25%.
Lily Megson, policy director at My Pension Expert, said: “Unexpected easing of inflation might sound optimistic on paper. But savers still face uncertainty. One thing is for sure, however: in the coming months, pension planning will be far from plain sailing – support is urgently required.”
Similarly, Mohsin Rashid, CEO of ZIPZERO, said: “While today’s small drop is another step in the right direction, inflation remains worryingly high.
“Indeed, in the eyes of consumers, it translates to many more months of struggling to afford essentials.
“Crucially, cut through the data and we see that food price inflation remains at eye-watering levels, and this is an unavoidable expense for households across the UK.”
He added that even if the cost of living crisis is easing, current inflation levels are still “an albatross around the neck of consumers”.
He concluded: “Things are not improving fast enough, so we must act to ensure people in need are not left behind.”