The latest inflation rate, which plays a key role in determining the annual rise in benefits such as jobseeker’s allowance, maternity allowance, housing benefit, and universal credit, has now dropped to 1.7%. This decrease is notable as the rate is used to set adjustments for benefit payments each April, affecting millions of individuals who rely on government support.

This recent figure represents a decline from the previous month’s inflation rate of 2.2%, according to the Consumer Prices Index (CPI). It’s the first time since 2021 that inflation has dipped below the Bank of England’s target, raising questions about the broader economic impact. The drop indicates that the price increases for goods and services have slowed down more than expected, offering some relief to households facing higher living costs.

Many analysts had predicted a slight reduction in inflation but expected the rate to hover around 1.9%. The sharper-than-anticipated fall to 1.7% may influence future economic policy decisions, including the potential for further adjustments to interest rates. Lower inflation could lead to a more cautious approach from the Bank of England as it aims to balance growth and inflation targets.

The Bank of England (BoE) has been consistently working to reduce inflation to its target rate of 2% by keeping interest rates elevated. By doing so, the central bank aims to curb rising prices and bring stability to the economy. Despite these efforts, inflation has remained stubbornly above target for some time. However, recent developments show a shift in the trend.

In a recent decision, the BoE trimmed the base interest rate to 5%, signalling a cautious approach as inflationary pressures begin to ease. Today’s inflation figure, which has fallen below the 2% target for the first time in three years, has come as a surprise to many analysts. This unexpected drop in inflation is likely to increase the likelihood of further interest rate cuts, as the BoE may consider more measures to support economic growth while keeping inflation in check.

This news is particularly encouraging for mortgage holders. With inflation below target and potential further cuts in the base rate, many people with mortgages could see lower monthly payments or more favourable mortgage deals. For households facing financial pressure, a reduction in rates could offer some much-needed relief in managing their budgets.

While lower inflation is generally seen as positive, it could mean that benefits may not increase as much as some people were expecting. This is because benefits are often adjusted in line with inflation rates.

A 1.7% inflation rate, as reported by the Office for National Statistics (ONS), reflects a slower rise in prices, not a decrease. Prices are still going up, but at a slower pace compared to recent years. The figure measures the average price increase of a range of goods over the year leading up to September 2024. It’s important to note that the CPI, which tracks inflation, does not account for changes in mortgage interest rates or house prices.

Inflation reached its peak at 11.1% in October 2022, driven by soaring energy costs following the outbreak of the Ukraine war. Since then, inflation has steadily declined, but prices remain higher than they were before this surge.

Inflation had dropped to 2% in both May and July this year but then rose slightly afterward. The last time inflation was below the government’s 2% target was in April 2021, when it stood at 1.5%. 

According to the ONS, the latest drop in inflation was mainly due to lower fuel costs and reduced airfares. However, food and non-alcoholic drink prices saw an increase, rising from 1.3% to 1.8%, marking the first rise in this category since March last year. 

Meanwhile, “core inflation,” which excludes volatile items like food and energy, also dropped from 3.6% to 3.2%. This provides a clearer view of overall inflation trends. Mortgage holders are now likely to see a cut in interest rates, with experts predicting a reduction from 5% to 4.75% during the Bank of England’s upcoming meeting on 7 November.

The Bank of England (BoE) committee is set to meet again in the week before Christmas, with its first meeting of 2025 scheduled for 6 February. While lower interest rates are beneficial for borrowers, they often mean lower returns for savers, as banks typically reduce their rates in line with the BoE’s cuts.

This month’s inflation rate, typically used to determine April’s benefit increases, could impact jobseeker’s allowance, maternity allowance, housing benefit, and universal credit. Although the government has not yet confirmed whether the 1.7% figure will be used, it is expected to be announced in the budget in two weeks.

Pensions, however, will rise by 4.1%, thanks to the triple-lock policy, which ensures pension increases are tied to inflation, wage growth, or 2.5%, whichever is highest.

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