The ONS has announced this morning that for the year to October, UK inflation has fallen sharply, to its lowest levels for two years – at 4.6% – even lower than experts were anticipating. Good news indeed.
Largely driven by a fall in energy costs, compared to last month’s inflation rate of 6.7% this reinforces the view that the direction of travel for inflation is continuing downwards. But, prices are still rising. So, what does it mean for consumers struggling with the cost of living crisis, for businesses and for advisers looking to help clients make the most appropriate financial decisions for the future? And what does it mean for the Bank of England ahead of its next interest rate decision?
Finance experts have been sharing their reaction to today’s positive inflation data as follows:
Lindsay James, investment strategist at Quilter Investors: “The Prime Minister will be breathing a deep sigh of relief today, especially given the political events of the last few days. Halving inflation was meant to be the easiest of his five priorities to achieve as it was a year on year comparison, and 2022 saw inflation rise sharply. Although things got a little close for comfort, today’s sharp drop in inflation to 4.6% is a positive step on the long road back to target levels. However, this has been predominantly driven by factors that look unlikely to be repeated in the months ahead.
“Energy prices are the most significant contributor to the fall, with gas costs highlighted as 31% lower in the year to October 2023, and electricity costs down 15.6%. Unfortunately the loss of £400 of support from the government per household towards energy bills makes the real impact on consumers ‘cost of living’ far more modest, whilst gas prices have recently moved higher, reflecting global supply constraints, which will feed into a higher Energy Price Cap from January onwards.
“Food appears to be seeing more consistent reductions, with this the seventh month of falling annual inflation readings, supported by a trend of falling prices for domestically produced food, increased competition amongst the supermarkets, and generally lower soft commodity prices.
Whilst this headline data will on the face of it be welcome news for the MPC, they will want to see more evidence of slowing inflation across the economy, rather than it coming primarily from fluctuations in international energy markets. With Core CPI (excluding energy, food, alcohol and tobacco) falling more gradually, now at 5.7% and down from 6.1% in September, it is clear that further progress towards the target of 2% is likely to be relatively slow.”
Danni Hewson, head of financial analysis at AJ Bell, comments: “Whilst we’re not talking about deflation, in fact many prices are still rising substantially, this fall in the headline rate of inflation will be psychologically important.
“Not only has CPI come in under 5% but it’s reached a two-year low and the number released this morning was cooler than had been expected.
“This time last year households were enduring the worst impact of the cost-of-living crisis. Energy bills had shot up, even with the government’s price cap, and the cost of keeping the lights on was causing a huge amount of distress for many businesses and individuals.
“This October falling energy costs are primarily responsible for this fall in the headline rate. But remember whilst bills have come down households aren’t getting those monthly payments which helped to offset the worst impact of those hikes last year. Food inflation is still in double digits and whilst many people are now feeling the benefit of real term wage increases budgets are still tight and any savings are likely to be long gone.
“It’s important not to get swept up in the wave of optimism and forget those people on the lowest incomes for whom the last couple of years have been debilitating. But for homeowners with a fixed rate mortgage due to come to an end in the next twelve months, today will bring relief.
“Market expectation that we have reached peak interest rates has solidified today and only three percent think the Bank of England will hike rates when it meets next month. Forty percent expect rates will start to fall in May next year, getting as low as 4.25% by the end of the year, and that expectation has already begun to filter through to lenders.
“Consumer confidence, households with a bit more money in their pockets and a sense of optimism about the future are all massively important things for business, for jobs and for growth, so today’s figures will likely leave many with a distinctly warmer feeling than in recent months.”
George Lagarias, Chief Economist at Mazars comments: “CPI receding at manageable levels probably puts the nail on the coffin of this rate hike cycle. We could begin to see the end for this inflation wave, especially if we don’t experience higher energy prices in the next few months. Lower inflation is consistent with the sluggish consumption data of the past two months. As such, one questions still looms large: will the economy that has succeeded in bringing inflation down to more manageable levels, also achieve to keep growth above the recession line?”
Andrew Gething, managing director of MorganAsh, said: “Given that inflation has remained unchanged for the past couple of months, it’s really positive to see it return to its downward trajectory – and by quite some margin too. It is now at its lowest level for two years, thanks mostly to the lower Ofgem energy price cap. A stabilisation of food inflation will be welcome news for many, although households continue to face pressure at the petrol pump.
“While the government will be happy to have met its end of year target to halve inflation, we mustn’t lose sight of the fact that we are still a way off from the illusive 2% target. There’s no question that pressures remain, particularly for the most vulnerable of households. We must also consider the increased burden for those still set to remortgage in the near future onto a much higher rate.
“As is such, it’s incredibly worrying to hear that firms are still reporting few or even no vulnerable clients, despite the fact that everyone is vulnerable at some point in their lives. It’s for this reason, wealth management and stockbroking firms found themselves in the crosshairs of the FCA in its most recent Dear CEO letter. Identifying those facing difficultly simply isn’t possible without a robust and consistent approach to assessing and monitoring consumer vulnerability. Even as inflation improves, this must be a priority for all firms across financial services.
“Although a reduction in the base rate still feels some way off, it is hopeful that today’s news will influence the Bank of England to hold rates once again when the MPC meets next month. However, we must heed the warning that further rises are certainly not off the table, especially if the economy experiences any severe shocks.”
Melanie Baker, senior economist at Royal London Asset Management, said: “Although Q3 Gross Domestic Product (GDP) was a touch stronger than expected, the details were downbeat with falls in consumer spending and business investment. The contribution to growth from net trade looks to have been much more positive than expected, but partly on the back of falling imports. That itself will likely partly reflect weakness in domestic demand.
“Looking at the monthly figures, it appears to paint a more positive story, with growth in September slightly stronger than in August. However, less industrial action in the health service, and warmer than average temperatures, appear to have played some role and the broader run of data still suggests this is an economy that has grown little since early 2022.
“The UK continues to avoid going into a technical recession, which would need two consecutive quarters of negative growth, though it clearly wouldn’t take much of a back revision for Q3 GDP to have fallen. The Purchasing Managers’ Index (PMI) business surveys continue to look consistent with modestly falling private sector output. If the UK continues to see little to no growth, the experience of the economy, including the jobs market, may not be very different than it would have been had the UK experienced short, mild recession.
“This release is likely to have little net effect on the Bank of England’s thinking. According to its recently published November Monetary Policy Report, it was expecting flat GDP in Q3 and 0.1% in Q4.”
Steven Cameron, Pensions Director at Aegon, said: “Today’s official inflation figure of 4.6%% from the Office for National Statistics shows the Government has delivered on its promise to halve inflation from its 10.7% starting point by the year end.
“It comes a day after figures show total earnings continue to increase at a rate of 7.9%. While this ‘real’ earnings growth of over 3% is good news for those of working age receiving average pay increases, it piles pressure on the Government as it weighs whether or not to honour the triple lock in full next April, with an announcement possibly made as part of the Chancellor’s Autumn Statement.
“The official formula would grant an 8.5% increase, based on year-on-year earnings growth for the May to July period. This is further above inflation than we’ve seen in recent months. With rumours of the Chancellor having more fiscal headroom than anticipated, the Government may decide to grant the full 8.5%, providing another bumper increase after this April’s highest ever 10.1%. But this is paid for out of the National Insurance of today’s workers and raises real questions around intergenerational fairness.
“There have been reports that the Government is considering adjusting the earnings growth figure downwards to take out the impact of recent one-off public sector bonuses which have created a ‘distortion’. While trimming it back to say 7.8% would save the Government hundreds of millions, it risks the wrath of the pensioner population ahead of an almost certain General Election next year.
“An 8.5% increase would see the New State Pension jump by a bumper £901.02 to £11,501.22 a year. The ‘old’ State Pension, for those who reached State Pension age before 6 April 2016, would also rise by £690.40 to £8,812.80.
“With the Government already having more than met its target of cutting inflation by half by the end of the year, the current 4.6% remains significantly above the Bank of England’s 2% target, so the headline rate may fall even further as we head into the early months of 2024. This means there’s a real chance that a State Pension increase of 8.5% could be more than double the ruling rate of inflation come next April. That’s unsustainable.
“Whatever the decision for next April, volatile price inflation and earnings growth add to growing concerns that the Triple Lock in its current form is unsustainable longer term. Prior to the General Election, we’re calling on the main parties to make clear their proposals to make it sustainable, reliable, and intergenerationally fair.”
Hetal Mehta, Head of Economic Research at St. James’s Place, said: “While today’s inflation drop to below 5% will be hailed as a major milestone in the progress to 2%, the UK remains one of the highest inflation economies. Core inflation is still stubbornly sticky at 5.7%. The next phase of inflation reduction will almost certainly be more painful for the economy as the easy wins on energy after largely behind us.”
Jonny Black, Chief Commercial and Strategy Officer at abrdn, Adviser, said: “While inflation easing to 4.6% is good news, the journey to this point has been slow and steady.
“Inflation-proofing income remains important for clients, and they’ll value their advisers’ help in reviewing their strategies and understanding where price rises may go next.
“This could be influenced by any changes to savings and investing policy announced by the Chancellor in next week’s Autumn Statement. With areas like ISAs rumoured to be under consideration, this will be something closely watched by advisers and their clients alike. Big changes could have big implications for long-term planning.”
Andy Mielczarek, Founder and CEO of SmartSave, a Chetwood Financial company, said: “Any drop in the rate of inflation is welcome news, and many Britons might be feeling a sense of relief that the worst of the cost-of-living crisis could finally be behind us.
“As consumers feel the pinch on their budgets loosen, they should take advantage of the opportunity to consider revamping their savings strategy. In particular, those holding significant sums in easy-access high-street savings accounts, many of which continue to offer paltry rates, could end up missing out on better returns in the months to come.
“The onus is on savers to search carefully for the right product and provider. For instance, as inflation continues to fall, those feeling more confident about setting money aside in a fixed-term savings account are likely to achieve better returns than those in easy-access or current accounts. And looking beyond the high street remains crucial when shopping around for the most competitive rates.”
Lily Megson, Policy Director at My Pension Expert, said: “While Rishi Sunak may pat himself on the back for nearing his target of halving inflation to 5%, the reality is that households continue to grapple with serious economic challenges. Ultimately, the cost of living is still rising, which throws into question how people are able to spend, save and invest their hard-earned money.
“There’s a pressing need for more robust support for those approaching or in retirement. If not, we will continue to see the worrying trend of people in their 50s, 60s and 70s either delaying their retirement, or unretiring to top up their pension pots.
“We have to hope that next week’s Autumn Statement provides clear, decisive actions to address the financial concerns of pension planners across the UK, and improving access to regulated, affordable advice must be central to this. Knowledge is power, and providing better access to advice will empower consumers to navigate the economic landscape far more effectively.”
Mohsin Rashid, CEO of ZIPZERO, said: “A notable fall in inflation, and particularly energy prices, is great news. But as another unavoidable expense, rising food prices remains a major concern. Something must be done.
“It would be nothing short of a miracle if predictions that food price inflation will be mostly gone by Easter are realised. And even if this comes to pass, that still leaves six months in which millions of households will continue to afford their weekly shop, entirely dependent on tight budgeting, shopping for deals, and squeezing every penny they can from promotions and rewards.
“Supermarkets have made some progress in pushing special offers to their loyalty card members, but their profit margins show there is still far, far more they could be doing. I urge them to do everything in their power to make life easier for households and ensure that today’s encouraging inflation news is the first step on the path to recovery.”
Jatin Ondhia, CEO of Shojin, said: “November is shaping up to be a significant month, with inflation falling, a new-look cabinet, and an incoming Autumn Statement — this is a pivotal moment for people to reassess how they are managing their finance and consider how to best supercharge their savings and investments.
“Even as inflation falls, investors cannot afford to be passive; in this environment, it is important to scrutinise your portfolio and explore every available option, considering both traditional and alternative assets.
“The political and economic landscape has shifted once again this past month, and investors’ risk tolerance and long-term financial goals may need to recalibrate too. What’s more, all eyes will now turn to Jeremy Hunt and next week’s Autumn Statement. Falling inflation is a boost to the Chancellor, and it will be intriguing to see what he pulls out the famous red briefcase in the way of impactful policies aimed at fostering growth and galvanising the investment landscape – investors will certainly need to take note.”
Richard Berry, founder of GoodMoneyGuide.com, says: “These better-than-expected inflation figures are a cause for hope for households, but it’s too early to be celebrating.
“Energy prices have played a major role in bringing inflation down, with the costs of electricity and gas falling by more than a fifth compared to this time last year.
“Tensions around the Israel-Gaza conflict and the ongoing war in Ukraine mean that energy costs are already predicted to be higher in 2024, and it wouldn’t take much for the Middle East tinderbox to ignite and push costs through the roof again.
“All eyes will now turn to the Bank of England, which has a difficult decision to make on interest rates.
“After months of punishing increases that have seen mortgage prices rocket, the Bank potentially has the latitude to bring rates down, but it’s not a move that home-owners should hang their hat on.
“The cost-of-living crisis has left every Briton poorer as the prices of everyday items have gone through the roof, and today’s news could be the light at the end of the tunnel.”
