Lower fuel and transport costs helped cut CPI inflation in the 12 months to September to 1.7% from 2.2% in August.

The decline pushed CPI inflation to its lowest level for three years.

Data from the ONS released today showed that inflation in September unexpectedly fell to below the Bank of England’s long term 2% target.

Industry experts believe the fall to below the 2% target could give the Bank of England room to cut interest rates on 7 November when it next announces an MPC decision. The current Bank of England base rate is 5%.

The Consumer Prices Index including owner occupiers' housing costs (CPIH) rose by 2.6% in the 12 months to September 2024, down from 3.1% in August. On a monthly basis, CPIH rose by 0.1% in September 2024, down from 0.5% in September 2023.

On a monthly basis, the ONS said CPI was little changed last month, down from a rise of 0.5% in September 2023.

Lower transport costs were a major factor in the fall. The biggest downward pressure on the monthly change in CPIH and CPI annual rates came from transport with lower petrol costs a factor. There were significant negative contributions from air fares and motor fuels, ONS said.

In contrast, the biggest upward pressure came from food and non-alcoholic beverages.

Core CPIH (excluding energy, food, alcohol and tobacco) rose by 4% in the 12 months to September 2024, down from 4.3% in August. The CPIH goods annual rate fell from negative 0.9% to negative 1.4%, while the CPIH services annual rate fell from 5.9% to 5.6%.

Core CPI (excluding energy, food, alcohol and tobacco) rose by 3.2% in the 12 months to September, down from 3.6% in August while the CPI goods annual rate fell from negative 0.9% to negative 1.4%, while the CPI services annual rate fell from 5.6% to 4.9%.

The Retail Prices Index (RPI) annual rate, the older measure of inflation, fell to 2.7%, down from 3.5% the previous month.

There was less good news for owner occupiers in September. The owner occupiers' housing costs (OOH) component of CPIH rose by 7.2% in the 12 months to September, up from 7.1% in the 12 months to August. ONS said this was the highest annual rate since March 1992. OOH costs rose by 0.6% on the month, up from 0.5% in September 2023.

The ONS says the Consumer Prices Index including owner occupiers' housing costs (CPIH) is the most comprehensive measure of inflation. It extends the Consumer Prices Index (CPI) to include a measure of the costs associated with owning, maintaining and living in one's own home, known as owner occupiers' housing costs (OOH), along with Council Tax. Both are significant expenses for many households and are not included in the CPI, ONS said.

Experts said the news of inflation coming down was welcome.

Rachel Winter, partner at wealth manager Killik & Co, said: “The return to below-target inflation for the first time since 2021 suggests the Bank of England’s tactics have worked almost too well. But we should not take stability as a fait accompli – with the UK Budget and the US presidential election now less than a month away, market volatility in the short term remains likely. Both these events could affect the exchange rate between the pound and the dollar, and this could have an impact on UK inflation. 

“Against this difficult landscape, the Bank of England needs to balance a complex cocktail of factors before voting for more interest rate cuts. For investors, the ongoing uncertainty underscores the need for a well-balanced portfolio. As volatility persists, diversification remains critical to mitigate risks from sector-specific disruptions.”

Hetal Mehta, head of economic research at wealth manager St James’s Place, said: “The fall in UK inflation is very broad-based, and for the BoE, the core inflation and services inflation numbers in particular will be good news. They should consolidate the expectations of a cut in November and perhaps the vote split will narrow. As for back-to-back cuts, I think more evidence of a continued decline in inflation is needed before we see this and suspect the BoE will also want to have a more time to digest the Budget announcements.”

Patrick O'Donnell, senior investment strategist, Omnis Investments, said: "That’s a big fall in Services inflation, below consensus estimates. Along with the easing of private sector wage growth yesterday, it’ll please the Bank of England. The market was already pretty convinced of a 25bps cut at the next meeting in November anyway.

"However, with Services inflation still running well above long-run averages, we’ll need to see an acceleration of the trend, or an exogenous market shock for the BoE to follow up with another cut in December."

Dean Butler, managing director for Retail Direct at Standard Life, part of Phoenix Group said likely rises in the State Pension were set to push more people into paying tax.

He said: “Inflation is back below the Bank of England’s 2% target and, unless the Chancellor makes a shock Triple Lock change at the Budget, we now know the state pension will rise by an inflation-busting 4.1% next spring in line with average earnings. This means that next year’s full new state pension is set to reach £11,975.60 annually, an increase of £473.

“This will come as welcome news to many, however there are possible tax implications for pensioners. The Personal Allowance, which is the amount of income you can receive before paying tax, has been frozen since at £12,570 since 2021/2022 and currently remains fixed in for quite a few years to come. This means that the full new state pension payment has grown from 70% of the allowance in 2019/20 to a likely 95% next year, leaving pensioners with only £594.40 of headroom before they begin paying income tax."