The UK’s inflation rate has reached 1.7% for the year ending September 2024, marking the lowest level in three and a half years. This shift comes as the Bank of England continues its efforts to manage inflation, which it aims to keep at 2%. To achieve this target, the Bank adjusts interest rates, recently lowering them to 4.75% in November 2024—its second reduction of the year.
Inflation represents the increase in prices over time. For instance, if a bottle of milk costs £1 one year and £1.05 the next, that reflects a 5% annual inflation rate for milk. The Office for National Statistics (ONS) tracks price changes of various everyday items through a “basket of goods,” which is updated to reflect shopping trends; recent additions include vinyl records and air fryers.
The primary gauge of inflation is the Consumer Prices Index (CPI). The CPI for September showed a decline from 2.2% in August, primarily due to falling airfares and petrol prices. This latest figure will influence numerous benefit payments set to increase in April 2025, although state pensions will rise by 4.1% under the triple lock system.
The falling inflation rate reflects a significant drop from its peak of 11.1% in October 2022, driven by surging energy prices post-COVID and geopolitical tensions impacting gas supplies.
Despite this decline, it is essential to note that prices are still on the rise; they are simply increasing at a slower pace. High food prices have been a persistent factor contributing to inflation levels exceeding the Bank’s target.
The Bank of England employs interest rate adjustments as a tool to control inflation. In response to soaring rates exceeding their target, interest rates were raised to 5.25%, a level not seen in 16 years. This approach aims to discourage spending by making borrowing more expensive while encouraging savings.
However, such measures can have adverse effects on the economy:
In November 2024, Governor Andrew Bailey indicated that further cuts might be forthcoming but emphasized caution regarding rapid decreases in rates.
Looking ahead, while inflation has eased in many regions—including a decrease in eurozone inflation to 1.8%—the International Monetary Fund warns that persistent inflation could necessitate prolonged higher interest rates across various economies.
As global economic conditions continue to evolve, monitoring these trends will be crucial for both policymakers and consumers navigating the changing landscape of prices and interest rates.
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