In a significant development, the United Kingdom experienced a notable drop in inflation in October, marking a two-year low at 4.6%, down from the previous month’s 6.7%. This decline in the headline consumer price index is expected to have implications on migration trends, offering a more favorable economic landscape.
Economists, who had anticipated a year-on-year rise of 4.8% and a 0.1% increase from the previous month in the headline Consumer Price Index (CPI), were taken by surprise as the CPI remained flat on a monthly basis. Core CPI, excluding volatile components such as food, energy, alcohol, and tobacco prices, saw a decline to an annual rate of 5.7% in October from 6.1% in September.
The Office for National Statistics revealed that the most substantial downward contribution to this inflation drop came from housing and household services, with the annual rate for CPI hitting the lowest point since records began in January 1950. Additionally, food and non-alcoholic beverages played a role in easing inflation, with the annual rate falling to its lowest level since June 2022.
This inflation dip comes on the heels of the Bank of England’s decision earlier this month to maintain its benchmark interest rate at 5.25%. The central bank had ceased a series of 14 consecutive hikes in September, aiming to bring inflation back towards its 2% target.
For Downing Street, the decline in inflation is a welcome development. Prime Minister Rishi Sunak had committed to halving UK inflation back in January when the annual CPI rate was above 10%. Suren Thiru, economics director at ICAEW, sees this steep drop as a sign that the UK has “turned the corner” in its battle against inflation.
Thiru notes, however, that the reduction in inflation is more a result of falling energy costs and rising interest rates than government action. Despite the achievement of halving inflation, Thiru suggests that subsequent declines might be more modest, with potential influences from a softening jobs market and high interest rates, possibly leading to a quicker return to the Bank of England’s 2% target.
Market analysts anticipate that the recent data will strengthen bets for the central bank to maintain interest rates at its December meeting. Lindsay James, investment strategist at Quilter Investors, suggests that the Monetary Policy Committee will likely seek more evidence of a broader slowdown in inflation across the economy before making further decisions. As Core CPI falls more gradually, now at 5.7%, the path toward the 2% target is expected to be relatively slow, indicating cautious optimism regarding migration prospects amidst the evolving economic landscape.