Inflation remains lodged at 6.7% but next move will be down

ITV News' Business and Economics Editor Joel Hills has this report as inflation remained the same in September, lower than was forecasted

“Inflation rarely falls in a straight line.”

So said the Chancellor of the Exchequer this morning, and he makes a fair point.

The annual headline rate of inflation remained lodged at 6.7% in September, but that is lower than the Bank of England had forecast (6.9%). The next move in October will be a lurch downwards as Ofgem’s lower energy price cap kicks in.

The upward pressure on consumer prices last month came in large part from petrol and diesel, which rose by more than 5 pence a litre in September - carried higher by the market price of oil.

But the oil price is volatile and there are plenty of reasons to believe the direction of travel is still due South(ish).

The first monthly fall in food prices in the UK for more than two years offers more hope the worst is over, but average food prices last month were still 12% higher than in September last year and 29% higher than in September 2021 when inflation really took off.

That is a mighty blow to household budgets.

Traditionally, the inflation rate in September determines the uplift to benefits the following April.

The Joseph Rowntree Foundation (JRF) has noticed that the Treasury Secretary, Andrew Griffiths, was not promising that will be the case this year in his round of broadcast interviews this morning. Although, note: Labour isn’t saying it should.

“Millions of families need the certainty that benefits payments will begin to recover some of the significant real terms losses suffered over the past two years, and they need that certainty now,” says the JRF.

Whither interest rates? “Higher for longer” is the current mantra of central banks in the UK, US and the Eurozone.

This appears to apply to the UK in particular, as we have the highest headline rate of inflation in the G7 club of wealthy nations.

Core inflation in the UK, which strips out energy and food prices, eased a little in September but 6.1% looks stubbornly high. Services inflation edged up to 6.9%, as pay growth in the private sector remains far stronger than the Bank of England is comfortable with.

Inflation is falling more slowly in Britain because of Ofgem’s energy price cap (which delays the impact of shifts in market prices, for better and for worse); because we rely on imported food (almost 50% of what we eat); because of tightness of our labour market (which has put upward pressure on pay and therefore prices) and because we are a major importer of gas, which was brutally expensive last winter.

The markets are betting that interest rates will remain above 5% until the end of next year.

What’s encouraging is that British manufacturers have been cutting the prices of the goods they produce consistently since June.

As it stands, it does look likely that Jeremy Hunt will be in a position to boast he has delivered on the government’s pledge to halve inflation (to 5%) in 2023 - although how much credit he can reasonably take is debatable and 5% will still feel painful for many families.

What could go wrong? The war in Israel and Gaza has the potential to force the global price of energy up again.

The market price of oil has increased above $90 a barrel since the conflict began but that’s still lower than last month and it’s too soon to judge what the lasting impact will be.

Of course, it is also remember that pay in the UK is now rising faster than prices.

At some stage, people should start feeling a little better off but higher interest rates are pushing up mortgage repayments, unemployment is edging up and some of the increase in earnings will taxed (the tax burden has reached a record high).

The cost of living crisis isn’t over yet.

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