Rishi Sunak was quick to claim credit for the lowest annual UK inflation rate in two years on Wednesday, saying that taming price rises had required “hard decisions and fiscal discipline” and would ease pressures on families.
But even as the prime minister declared that he had met his pledge to voters to halve price growth by the end of 2023 — a landmark widely predicted by analysts and the Bank of England — his government was confronting an uncomfortable reality that will hang over its Autumn Statement next week.
Although inflation has eased sharply since the start of the year, it is still well over twice the BoE’s 2 per cent target. The price level measured by the consumer prices index is still up by one-fifth since the eve of the inflationary upsurge in early 2021, highlighting a fierce squeeze on household incomes.
Data from the Office for National Statistics showed a steeper than expected drop in the headline inflation rate to 4.6 per cent in October, driven in part by a reduction in energy regulator Ofgem’s price cap.
The core CPI rate, which excludes energy and food, rose 5.7 per cent in the 12 months to October, down from 6.1 per cent in September.
Crucially, the rate of services inflation, which is closely watched by BoE interest rate-setters as a gauge of domestic price pressures, slowed more than expected from 6.9 per cent to 6.6 per cent. “Some genuine progress is being made”, said Philip Shaw, an economist at Investec.
Sunak is hoping for a brighter economic picture ahead of the general election expected next year. But analysts stressed that the better figures would by no means translate into a feelgood factor for households, in view of the continuing legacy of the worst inflationary surge for a generation.
Consumer prices are still 21 per cent higher than in January 2021, before factors including supply chain disruption and Russia’s invasion of Ukraine caused them to soar.
This means people can buy less with the same money, while interest rates of 5.25 per cent heap pressure on already-squeezed household finances. Despite robust wage growth, the real value of workers’ pay has fallen for most of the past two years.
Tomasz Wieladek, chief European economist at investment company T Rowe Price, said households would “continue to feel the effect of higher prices on their disposable incomes for some time to come”.
For consumers, what matters is the cumulative effect of more than two years of high inflation. On the ONS measure of earnings growth, which reports faster wage growth than most others, earnings adjusted for inflation are still below their levels in January 2021.
Pay growth has outpaced inflation in recent months, but “it will take time for households to recover the purchasing power eroded over the past year”, said Yael Selfin, chief UK economist at advisory firm KPMG.
Last month, headline inflation was driven lower by a decline in energy prices, which have steadily fallen since they jumped in October last year.
The inflation rate in electricity, gas and other fuels dropped to minus 21.6 per cent last month from a peak of nearly 90 per cent in the same month last year. Nevertheless, prices were still 82 per cent above January 2021 levels.
Food prices display a similar trend. In October, UK food inflation dropped to 10.1 per cent, the slowest since June 2022, but prices last month were still 30 per cent higher than in January 2021.
Since poorer households spend a greater proportion of their income on essentials, the need for higher spending on energy and food can hit them hard. High prices are hard to avoid because neither category is easy to substitute.
Detailed grocery data published by the ONS alongside its main inflation report showed the prices of sugar, baked beans, canned tomatoes and cooking sauces were all at least 50 per cent higher than in January 2021.
Frozen beef burgers, cheese and milk all cost at least one-third more than in early 2021. One litre of olive oil cost £3.50 two years ago; last month it was £7.16.
Some goods, such as computers and TVs, are on average cheaper now than in 2021. The cost of toys, medical services and some financial services have largely stagnated over the past two years.
But at the same time, consumers have been hit by rising prices in many other areas, including insurance, clothing, flight tickets and accommodation. Relative to January 2021, these were up 41 per cent, 25 per cent, 78 per cent and 33 per cent respectively last month.
Shadow chancellor Rachel Reeves pointed to the continuing squeeze, saying “higher mortgage bills, prices still rising in the shops and inflation twice as high as the BoE’s target” meant Britons were still worse off.
A key question for households is how soon decelerating inflation will permit the central bank to begin reversing its rate rises, which have left borrowing costs at their highest since the 2008-09 financial crisis.
The slowdown in inflation last month was sharper than analysts and the BoE expected, prompting financial markets to reassess expectations for rates.
Before the ONS release, markets had priced a smaller reduction to 4.75 per cent by the end of next year. They are now predicting that the first rate cut could occur as early as June 2024, and that rates could fall to 4.5 per cent by December 2024.
The reassessment will ease fixed mortgage rates and bring some relief to homebuyers and mortgage holders struggling with high payments.
Nevertheless, UK inflation is still higher than the 2.9 per cent rate in the eurozone and 3.2 per cent in the US, and the BoE has signalled that it will start reducing borrowing costs only after it has seen definitive evidence of a cooling labour market and price pressures.
Chris Hare, economist at HSBC, said that while the fall in inflation in October was “welcome”, it did not mean the broader mission to bring down price rises was over.
“The road to 2 per cent could be a long and challenging one,” he said.
Additional reporting by Ella Hollowood in London