UK Inflation Drops Below 2% for First Time in Three and a Half Years

UK inflation dropped to 1.7%, the lowest in three and a half years. This fall, driven by lower air fares and petrol prices, marks the first time it’s below the Bank of England’s 2% target since 2021.

The decline gives a boost to Chancellor Rachel Reeves, who aims to protect household incomes and repair public services in her upcoming budget. Lower inflation supports her goal but also pressures the Bank to cut interest rates.

The pound weakened against the dollar and euro, while UK borrowing costs fell. Darren Jones, Treasury chief, welcomed the news but emphasized the need for continued economic stability.

Petrol prices dropped due to lower crude oil costs, offsetting rising food prices. Economists predict a November interest rate cut to 4.75%.

Investors warn of potential inflation reversal due to energy price cap hikes. The budget will be crucial in assessing its impact on inflation.

Benefits will rise less than expected, disadvantaging many households. The state pension, however, will increase significantly due to the “triple lock” policy.

Lower inflation and borrowing costs could benefit public finances but may also signal economic weakness. Reeves faces pressure to boost living standards and repair public services.

The budget aims to address a £22bn fiscal gap, with potential tax rises and spending cuts. The TUC urges a focus on economic growth to rebuild the economy.