Time to wrap up, after a milestone day in Britain’s cost of living crisis.

Inflation in the UK has fallen to its lowest level in three and a half years, giving a pre-budget boost to Rachel Reeves as expectations grow for the Bank of England to cut interest rates.

Figures from the Office for National Statistics show the consumer prices index dropped sharply to 1.7%, down from 2.2% in August, in a bigger fall than anticipated in financial markets, driven by lower air fares and petrol prices.

It is the first time headline inflation has dropped below the central bank’s 2% target since April 2021, giving positive news to the chancellor before her set-piece tax and spending event in two weeks’ time.

Reeves has said Labour’s first budget since 2010 will focus on three key objectives: protecting household incomes, repairing public services, and fixing the foundations of the economy with investment in infrastructure. The chancellor has said low and stable inflation is key to her first goal.

Economists said the drop in inflation increases the possibility of the Bank of England making two cuts to UK interest rates befor the end of the year, in both November and December.

Tonight, the money markets indicate that a quarter-point cut, from 5% to 4.75%, next month is a 91% chance.

The pound also weakened, hitting a two-month low before $1.30 before a small recovery.

Shares rallied in London, where the FTSE 100 index is up 82 points or 1% in late trading with housebuilders among the risers.

But the fall in inflation comes at a bad time for those on working age benefits.

The annual rise in benefits, including universal credit, is typically based on the previous September’s inflation measure, meaning recipients will probably only receive an increase of 1.7%.

State pensions, which are linked to the higher of earnings, wages, or 2.5%, are on track for a 4.1% rise.

And here’s the rest of today’s news stories so far:

Shares in UK ingredients company Tate & Lyle have jumped over 10% on the back of a report that private equity firm Advent International is preparing a takeover offer.

The Financial Times is reporting that Advent is “in the early stages of its bid preparations” for the FTSE 250-listed company

They add:

Advent has yet to propose an offer, the people [two people with direct knowledge of the matter] added.

An approach would come at an inconvenient time as Tate & Lyle is in the process of making its own purchase, having agreed to buy pectin and speciality gums provider CP Kelco for $1.8bn.

The drop last month in the overall rate of inflation to 1.7% was driven by large changes in the cost of air travel, fuel and household staples such as pizza and rice – though some items saw prices continuing to rise, PA Media reports.

The biggest movement was in the average cost of passenger travel by plane, which fell by 5.0% in the year to September, having previously jumped sharply by 11.9% in the 12 months to August.

Other products seeing a switch from rising to falling prices include pizzas and quiches, the cost of which dropped by 3.3% in the 12 months to September after increasing 4.3% in August; carpets and rugs, down 2.9% last month after rising 0.6% in August, and butter, down 0.2% after increasing 0.9% in August.

Petrol and diesel both recorded a larger annual fall in price in September than in August, with petrol down 10.9% last month compared with a drop of 4.2% in August, and diesel down 9.9% compared with a drop of 2.2%, according to figures published by the Office for National Statistics (ONS).

A similar trend was seen in a handful of everyday household goods, with the average cost of rice falling more steeply in September (down 3.9%) than in August (down 2.3%), as did the cost of bed linen (a drop of 2.2% in September compared with a fall of 0.8% in August) and crisps (-2.2% in September, -1.1% in August).

By contrast, some items saw prices falling less slowly last month than in August, most notably cheese, the average cost of which dropped 1.2% in the year to September, having enjoyed a much larger decrease of 4.7% in the 12 months to August.

The price of fish was down 1.6% in September, a smaller annual drop than 3.0% in August, and it was a similar story for the average cost of second-hand cars (down 6.3% last month after falling 6.6% in August) and women’s shoes (down 2.4% in September, down 2.6% in August).

A few items swung from negative to positive inflation, such as cleaning equipment, where prices rose last month by 4.3% having fallen in August by 3.3%; fruit and vegetable juices, up 4.4% last month after a drop of 0.4% in August; and children’s footwear, up 3.7% in September following a drop of 1.1% in August.

There were also instances of inflation accelerating, including the average price of coffee (up 4.1% in the year to September, up 1.2% in the year to August); tea (up 6.2% last month, up 3.5% in August); and breakfast cereals (up 2.8% last month, up 1.3% in August).

The Bank of England cannot declare ‘victory’ over inflation, even though it’s finally dropped below its 2% target, argues analysts at Japanese bank Nomura.

They suggest that the BoE may not take the drop in services inflation (from 5.6% to 4.9%) at face value, as much of the drop is due to cheaper air fares.

Nomura told clients:

Services inflation momentum slowed sharply in September and the BoE has now been surprised considerably to the downside versus its forecast in the August MPR (monetary policy report)

However, the weakness in services inflation was driven in large part by airfares, which are a component that the BoE often looks through.

The Bank of England will take comfort in today’s numbers, but still cannot claim victory over services inflation. Challenges remain, suggesting it can only cut once per quarter.

The money markets, though, are forecasting that UK interest rates fall to around 3.75% by next August, implying five cuts over the next 10 months.

Britain’s inflation shock may be over, but the country’s period of industrial unrest is not!

London Underground workers, including drivers, are to stage a series of strikes next month in a dispute over pay.

Members of Aslef, working as Tube drivers, instructors, management grades, and those in the engineering section will walk out on different days in the first few weeks of November.

Finn Brennan, Aslef’s full-time organiser on London Underground, said:

“We don’t want to go on strike – we don’t want to make travelling in and around the capital more difficult for passengers and we don’t want to lose a day’s pay – but we have been forced into this position because LU management won’t sit down properly and negotiate with us.

“Our members voted by over 98% in favour of strike action, but Underground management are still refusing to even discuss key elements of our claim.

“They refuse to discuss any reduction in the working week or introducing paid meal relief to bring Underground drivers in line with those on the Elizabeth line and London Overground.”

Aslef said a pay offer of 3.8%, plus a variable lump sum, means Underground drivers will stay on a lower salary than drivers on other Transport for London services while working longer hours.

The Joseph Rowntree Foundation, which works on tackling poverty, is also concerned that September’s fall in inflation will mean a measly rise in benefits next April.

The JRF says a 1.7% increase would mean the standard allowance basic rate of universal credit (UC) would rise by around £1.50 a week from its current level of £90.55, while the basic rate for couples would go up by around £2.50 a week from the current level of £145.13 a week.

[As explained at 10.25am, September’s CPI rate is usually used to set benefits the following year]

The JRF’s Iain Porter explains:

“The consequence of today’s rate of inflation is that April’s uprating will be worth just a few pounds to most people.

“The reality is millions of families can’t afford enough food this week, or to turn the heating on as the nights get colder – emphasised by the fact that food price inflation has risen for the first time since early last year.

“The basic rate of universal credit is so insufficient it fails to protect families from hardship, and this increase will barely touch the sides.”

September’s fall in UK inflation looks likely to be bad timing for millions of people who receive state benefits linked to the figure, who could be set to see their payments rise by just 1.7% next April.

A number of benefits, including universal credit, are uprated each tax year in line with the cost-of-living figure for the previous September.

The fall in September, driven by falling air fares and transport costs, disguised increases in some categories, including food and drink, which recorded inflation of 1.9%.

The Resolution Foundation think tank said the 1.7% figure would mean that a typical low-income family with two children on universal credit would see their annual payment rise by £253 next April.

It said the fall in the headline figure was likely to be temporary as previous falls in energy prices dropped out of the 12-month inflation calculation, and suggested inflation could increase to 2.2% in October.

If the 2.2% figure was used, that same family would be £74 better off as the annual uplift would be £327.

State pensioners are protected by the triple lock and look set to see their payments rise in line with wages next year, meaning an increase of 4.1% next April.

This will add £473 a year to the full state pension.

Lalitha Try, economist at the Resolution Foundation, said:

“This temporary fall is badly timed for millions of low-to-middle income families as will result in a lower increase in their benefits next year.

“A more timely measure of benefit uprating would deliver a cash gain to a low-income family with kids of around £74 next year.

“The government needs to address the age divide in benefits which has left working-age support fall further behind rising wages and living standards.”

A cut in UK interest rates would be good news for borrowers but is likely to lead to a cut in savings rates.

The gap between UK and German borrowing costs has narrowed today.

The yield (or interest rate) on 10-year UK gilts is now 189 basis points higher than the equivalent for bunds. That’s the smallest gap since 4th October.

The yield on 10-year gilts has dropped below 4.1% today (see earlier post) to 4.085%, while German 10-year bund yields dropped by less, to 2.194%.

Back on the 8th October, the Financial Times caused a stir by reporting that investor concerns about the Labour government’s Budget had pushed the gap with Germany to the widest in more than a year.

However, there were other factors in play. For starters, uncertainty over how quickly the Bank of England might cut interest rates (which has been somewhat resolved today). Secondly, UK borrowing costs was tracking those of the US, which have been pushed up by stronger data from the American economy.

Thirdly, Germany appears to be sliding into recession again – countries with low growth tend to have low bond yields.

Fourthly, expectations of cuts to eurozone interest rates by the European Central Bank have been rising.

As bond market expert Toby Nangle wrote in the FT this week, bond investors are “frenemies at best to a pro-growth chancellor”, so Reeves should not try to appease them in the budget by squeezing borrowing for investment.

Nangle says:

The greatest risk to long-term fiscal sustainability is low growth. And so the greatest compliment the bond market can give a chancellor aiming for economic rejuvenation is a mild sell-off.

Rising expectations of a November cut to UK interest rates, and the falling pound, are boosting share prices in London this morning.

The FTSE 100 share index has gained 52 points, or 0.65%, to 8,300 points.

Housebuilders, who benefit from lower interest rates, are among the risers, with the newly formed Barratt Redrow up 3%, Taylor Wimpey up 2.3% and Persimmon up 2.1%.

Hotel operator Whitbread are the top riser, up 4.5%, after raising its dividend and bolstering its share buyback programme by £100m.

The drop in the pound should help multinationals listed in London, as it makes their overseas earnings more valuable in sterling terms.

The pound is continuing to fall, and has now hit an eight-week low against the US dollar.

Expectations of faster cuts to UK interest rates have pushed sterling below $1.30 – it’s trading at $1.29975, the lowest since 20 August.

Matthew Ryan, head of market strategy at global financial services firm Ebury, suggests the pound could fall further in the near term:

“The pound has slumped to its lowest level on the dollar since August this morning after a surprise miss in the latest UK CPI report, which has seen inflation fall below the Bank of England’s target for the first time in three-and-a-half years.

“We think that the data now effectively guarantees another interest rate cut from the MPC at its next meeting in November, with a 25 basis point move more than 90% priced in by swap markets. Indeed, we now see a heightened possibility that both the vote is unanimous, and that the bank strikes a more dovish tone in its communications that hints at faster cuts ahead. Markets are already preparing for such an eventuality, and now see a three-in-four chance of back-to-back rate reductions in November and December.

“Both of these scenarios would be clearly bearish for sterling, which we think could be in for some additional near-term downside, particularly should the Labour government also unveil broad-based tax hikes in the October budget.”

UK government borrowing costs are dropping this morning, in a boost for the chancellor as she draws up the budget.

The yield (or rate of return) on 10-year UK bonds has dropped below 4.1% this morning, down from 4.165% last night.

Yields fall when bond price rise, so this suggests investors are buying into gilts today in anticipation of cuts to UK interest rates, following the larger-than-expected drop in inflation.

Lower yields cuts the cost of issuing new bonds to service the national debt, or to fund investment.

It emerged last night that Rachel Reeves has told the cabinet that the UK still faces a £100bn black hole in the public finances over the next five years, amid reports that the chancellor could make £40bn of tax rises and spending cuts in this month’s budget.

Yesterday, the International Monetary Fund cited the United Kingdom as an example of a country where debt risks were “elevated”, and where it would be “costly” to delay action to bring down borrowing.

This may “require operating on both spending and revenue measures”, the IMF suggested in its latest fiscal monitor.

The TUC are chivvying the Bank of England to cut interest rates next month, warning that it is falling behind other central banks.

TUC General Secretary Paul Nowak said:

“Working people will breathe a sigh of relief that the high inflation rates of recent years now appear to be behind us. But rising living standards rely on stronger growth.

“The last 14 years of Tory chaos and confusion have played havoc with our economy – and workers have paid the price.

“Households are still hurting, and families need a fresh start.

“With CPI now below target and GDP growth at just 1% for the last 12 months, this month’s budget is an urgently needed opportunity to unleash a new era of growth to help us repair and rebuild our economy and our country.

“The time is also right for the Bank of England to make another rate cut. Compared to other central banks, they are now off the pace on cutting interest rates.”

The TUC are right that Threadneedle Street (where the BoE is based) are looking tardy. Having raised rates to 16-year highs, it has only made one cut, in August, as many of its policymakers are concerned about UK inflation pressures being sticky.

The European Central Bank has already made two quarter-point cuts to its key interest rates this year.

And the US Federal Reserve started its loosening cycle with a bang last month, cutting its policy rate by half a percentage point.

A cut to UK interest rates next month is looking rather nailed on, after inflation tumbled below the Bank of England’s 2% target this morning.

The money markets are currently indicating that a quarter-point cut to Bank rate at the BoE’s next meeting in early November is a 91% chance. That’s up from just below 80% before the inflation report was released at 7am.

Such a cut would bring UK interest rates down from 5% to 4.75%.

Earlier this month, BoE governor Andrew Bailey told the Guardian that the Bank could become a “bit more aggressive” in cutting interest rates provided the news on inflation continued to be good.

Today’s drop in the CPI index to just 1.7%, from 2.2%, appears to meet the ‘good news’ yardstick.

Debapratim De, director of economic research at Deloitte, says:

“Price pressures continue to recede in the UK. Softening wage growth and services pricing point to further easing in the coming months.

“With inflation in retreat and UK growth slowing, the Bank of England will likely follow its August rate cut with another 25 basis point reduction in interest rates in November.”

Yesterday’s data showing a slowdown in wage growth could also encourage the Bank to hit the ‘cut button’ again.

Gora Suri, economist at PwC, agrees that the case for a November rate cut has strenthened:

Headline CPI inflation came in at 1.7% in September, dropping below the Bank of England’s target for the first time in three years, and adding to calls for another rate cut in November. This was mainly driven by downward contributions from motor fuels and air fares. Overall, this suggests we are very much at the end of the disinflationary process, which will be welcome news for policymakers and of course, consumers and businesses.

“Services inflation, the main area of concern, also fell considerably from 5.6% to 4.9%, and we are starting to see meaningful movement on wage growth, with annual growth in employee’s total earnings declining from 4.1% to 3.8%. All this is encouraging but upside risks to the headline rate remain, such as an increase in household energy prices and the potential for a spike in oil prices amid an escalation of conflict in the Middle East.

“The latest wage and inflation data is likely to further strengthen the case for a 25bp rate cut in November, especially considering the Bank’s increasingly dovish stance.”

Motor fuel prices fell by over 10% in September, compared with a year ago, today’s inflation report shows.

The ONS reports that the average price of petrol fell by 5.5p per litre between August and September 2024 to 136.8p per litre, down from 153.6p per litre in September 2023.

Diesel prices fell by 6.0p per litre in September to 141.8p per litre, down from 157.4p per litre in September 2023.

Here’s a breakdown of the various price changes in the UK’s inflation basket, which combined to push the CPI rate down to 1.7% in September:

• Food and non-alcoholic beverages: 1.9%, up from 1.3% in August

• Alcoholic beverages and tobacco: 4.9%, down from 5.8%

• Clothing and footwear: 0.8%, down from 1.6%

• Housing, water, electricity, gas and other fuels: -1.7%, down from -1.6%

• Furniture, household equipment and maintenance: -1%, up from -1.3%

• Health: 5.2%, down from 5.5%

• Transport: -2.2%, down from 1.3%

• Communication: 5.2%, up from 4.1%

• Recreation and culture: 3.8%, down from 4%

• Education: 4.4%, down from 4.5%

• Restaurants and hotels: 4.1%, down from 4.3%

• Miscellaneous goods and services: 3.3%, unchanged.

Darren Jones, chief secretary to the Treasury, has given a somewhat guarded welcome to the drop in inflation this morning.

Jones says:

“It will be welcome news for millions of families that inflation is below 2%.

“However, there is still more to do to protect working people, which is why we are focused on bringing back growth and restoring economic stability to deliver on the promise of change.”

With inflation firmly below the Bank of England’s 2% target, policymakers could potentially cut interest rates at their final two meetings of 2024.

So says Lindsay James, investment strategist at Quilter Investors:

“For the first time in more than three years inflation is back below the Bank of England’s 2% target. With inflation falling below this level and the pace of wage growth slowing, the conditions appear ripe for another rate cut at the Bank of England’s next decision in early November, and maybe even the one after in December too.

This will please the government in the run up to the hotly anticipated budget, where we are being repeatedly told tough decisions are to be announced, so any sliver of good economic news will likely be pounced upon.

Encouragingly, core inflation has also fallen – but it’s still higher than the headline CPI index.

Core CPI (which strips out energy, food, alcohol and tobacco) rose by 3.2% in the 12 months to September 2024, down from 3.6% in August.

Goods prices fell at a faster rate – the CPI goods inflation index fell to -1.4% last month from -0.9% in August.

Services inflation slowed, from 5.6% to 4.9%.

The pound has dropped on the foreign exchange markets, after UK inflation dropped faster than expected in September.

Sterling has lost half a cent against the US dollar, to $1.302, down from $1.307 before the CPI data hit the newswires.

Traders will be calculating that September’s larger-than-expected drop in inflation makes it easier for the Bank of England to cut interest rates (which makes it less lucrative to hold sterling).

Cheaper petrol and flights helped push UK inflation down last month.

But there was a pick-up in food inflation.

ONS Chief Economist Grant Fitzner says:

“Inflation eased in September to its lowest annual rate in over three years. Lower airfares and petrol prices were the biggest driver for this month’s fall.

“These were partially offset by increases for food and non-alcoholic drinks, the first time that food price inflation has strengthened since early last year.

“Meanwhile the cost of raw materials for businesses fell again, driven by lower crude oil prices.”

Newsflash: UK inflation has fallen below the country’s 2% target for the first time in three and a half years.

In a milestone moment in the cost of living squeeze, the consumer prices index (CPI) fell to 1.7% in September, new data from the Office for National Statistics shows, down from 2.2% in August.

This is the lowest reading for inflation since April 2021.

That should cheer the Bank of England, after it hiked interest rates through 2022 and 2023 to fight rising prices, before making its first cut in August. This may mean a second cut in November.

Investors had expected inflation to fall to 1.9%.

An important reminder: This drop in inflation doesn’t mean prices are falling, simply rising at a slower rate compared to a year ago. The level of prices for many items is still much higher than before the inflation spike of 2022.

Details to follow…

The cost of living squeeze is not abating for tenants, new data this morning shows.

Rightmove reports that average advertised rents have hit new record levels in the last quarter.

Its data shows that the average advertised rent for new properties outside of London hit a record of £1,344 per calendar month (pcm). That’s a 5.2% increase on a year ago.

Within the capital, rents have also reached a new record, with an average of £2,694 pcm – a 2.5% rise compared to last year.

A record proportion of former rental homes are currently on the market for sale, the property portal reports.

Rightmove’s Tim Bannister says:

“While we’re seeing some signs of improvement in the market’s chronic levels of demand and supply imbalance helped by a slight increase in the number of available rental properties, affordability remains a key challenge for renters as prices continue to hit new records. Tenant competition has eased slightly from last year, but the market is still far from balanced.

“We are seeing some landlords choosing to exit the market with potential tax changes and stricter EPC regulations as additional factors in landlords’ decision-making. With rental supply under strain, incentivizing landlords to invest in energy-efficient upgrades or offering tax relief could help maintain rental supply and, ultimately, ease affordability pressures for tenants.”

Deutsche Bank predict UK inflation will drop to 1.8% in September, which will be a “cyclical low”, they say.

The bad news for consumers is that Deutsche also believe “upward momentum” will likely gather pace, pushing inflation up again.

Sanjay Raja, their chief UK economist, told clients:

The recent run of energy deflation will likely come to an end shortly. Indeed, pump prices are likely to reverse course in October, while dual fuel bills will see a hefty 10% rise.

The upcoming Autumn Budget also raises risks to short-term inflation, with alcohol and tobacco duty increases potentially in the offing. A 10-15% net increase in VAT is also expected for private school fees come Jan-25. And lastly, an unwind of the fuel duty cut also looks likely in March/April.

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Today could be an important day in the UK’s battle against rising prices.

Economics predict that UK inflation fell in September, to around 1.9% – crucially below the Bank of England’s 2% inflation target, for the first since since April 2021.

Such a fall would be a relief for the Bank of England, which has been trying to squeeze inflation out of the economy through higher interest rates, and could pave the way for a cut in borrowing costs in November.

In August, inflation was recorded at 2.2%, and many in the City expect the rate of price rises slowed last month – further away from the peak of 11.1% in October 2022.

Economists at Pantheon Macroeconomics have predicted a 1.9% reading for the month, driven by the sharp fall in motor fuel prices last month.

Pantheon added that falling air travel fares are also likely to contribute to a dip in inflation, although these could be partially offset by higher domestic hotel prices.

Investec analysts have suggested CPI could drop as low as 1.7%, largely driven by that “hefty” fall in fuel prices.

We get the data at 7am…

The agenda

• 7am BST: UK inflation report for September

• 9.30am BST: House price and rental costs data from the ONS

• Noon BST: US weekly mortgage approvals

• 2pm BST: IMF to publish a chapter of its World Economic Outlook