Inflation dropped to 3.6 per cent in the year to October, according to figures published by the Office for National Statistics (ONS) on Wednesday.
Although the consumer prices index (CPI) remains well above the Bank of England’s 2 per cent target, the latest reading marks the first fall in three months after inflation held at 3.8 per cent throughout the summer.
The Bank has already signalled that it believes inflation has “peaked”, having kept interest rates at 4 per cent earlier this month, and most economists now expect a gradual easing in price pressures.
Analysts say the decline reflects the fading impact of last year’s surge in Ofgem-regulated energy bills, while the costs of hotels were was also a downward driver.
This was offset by rising food prices.
Core inflation, which excludes volatile measures like food and energy prices, was 3.4 per cent, which is down from the previous month’s reading of 3.5 per cent.
Services inflation, which measures the general increase in prices for services rather than physical goods and is closely watched by the Bank, was 4.5 per cent, also down from September’s 4.7 per cent figure.
The figures will offer Chancellor Rachel Reeves a rare piece of positive economic news just a week before she delivers her Budget on 26 November.
What will happen to inflation in the future?
Most economists now expect inflation to begin a steady decline.
Stephen Barber, professor of global affairs at the University of East London, told The i Paper: “While not as quick as policymakers had hoped, inflation has fallen sharply since the double digit levels of a couple of years back.
“This latest fall perhaps confirms expectations that it will continue this trend through 2026.”
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The Institute for Fiscal Studies (IFS) expects CPI inflation to return to target in the first half of next year, as the impact of tax changes announced in last October’s Budget drops out of the calculation.
The Bank, however, forecasts that inflation will remain above the 2 per cent target for another two years, until 2027.
James Moberly, a UK economist at Goldman Sachs, said food inflation was expected to fall slightly after a British Retail Consortium survey showed prices were rising at a slower pace than expected.
He added the annual increase in university fees would contribute to keeping inflation levels relatively high.
What does changing inflation mean for interest rates?
When inflation stays high, prices rise more quickly, increasing the likelihood that the Bank will keep interest rates elevated for longer.
Despite a cut, inflation is still high. The base rate currently stands at 4 per cent, following a cut in early August.
Despite inflation remaining well above the Bank’s 2 per cent target, another rate reduction at next month’s meeting is still a possibility, though not guaranteed.
Robert Wood, chief UK economist at Pantheon Macroeconomics, said he is “confident” there will be a rate cut on 18 December, though he acknowledged he is less certain about the Monetary Policy Committee’s approach beyond that point.
Robert Salter, director of Block Rothenberg, shares this view and anticipates a 0.25 percentage point cut to 3.75 per cent.
What does this mean for mortgages?
While mortgages are not directly determined by inflation, many products are influenced by the Bank’s base rate, which in turn is shaped by inflation.
Tracker mortgages and standard variable rates move directly with interest rate changes, while fixed-rate deals tend to follow swap rates, which reflect long-term expectations for the base rate.
Mortgage rates are broadly expected to fall as we move into 2026, particularly if the Bank delivers a cut at its next meeting.
Lower interest rates generally lead to cheaper mortgages. However, the impact won’t be immediate. As Mr Salter noted: “A drop in the official rate of interest may help mortgage holders in due course, as most mortgages are reasonably long-term fixed rate agreements.”
What about savings?
High inflation is bad news for savers as it erodes the value of money held in the bank. Therefore, the lower the rate, the better the news for savers.
The effects of inflation on the Bank’s interest rate also affects savers, because of the base rate’s influence on savings rates. Savings rates have dropped in recent months, though it is possible to bag a deal that beats inflation.
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For example, Monument Bank offers 4.51 per cent, including a 0.74 per cent newbies-only one-year fixed bonus – well above inflation – for customers who deposit at least £25,000.
Chase pays 4.5 per cent to new customers, with a one-year 2 per cent fixed bonus on top of its 2.5 per cent variable rate. This is app-only and you only need to deposit £1.
Mr Salter said a 0.25 percentage point cut next month “would probably be unwelcome to many savers, as banks and building societies will inevitably reduce the rates they pay on people’s savings to mirror such a change”.
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