The rate at which prices are rising dropped to 4.6% in the year to October, down from 6.7% in the year to September.
The sharp fall was due to cheaper energy prices.
In a bid to curb inflation, the Bank of England has increased interest rates to 5.25%, but held rates at its September and November meetings.
What does inflation mean?
Inflation is the increase in the price of something over time.
If a bottle of milk costs £1 but £1.05 12 months later, then annual milk inflation is 5%.
How is the UK’s inflation rate measured?
The Office for National Statistics (ONS) tracks the prices of hundreds of everyday items in an imaginary “basket of goods”.
The basket is regularly updated to reflect shopping trends, with the most recent changes adding frozen berries and removing alcopops.
Each month’s inflation figure shows how much these prices have risen since the same date last year.
You can calculate inflation in various ways, but the main “headline” measure is the Consumer Prices Index (CPI).
CPI was 4.6% in the year to October, down from 6.7% in September and August.
Economists say the main reason for the latest drop is a reduction in the energy price cap, which took effect on 1 October.
Food prices were little changed in September, but hotel prices fell, according to ONS figures.
What is ‘core inflation’?
“Core inflation” excludes the price of energy, food, alcohol and tobacco.
This measure was 5.7% in October, down from 6.1% in September.
The Bank of England considers this number as well as CPI when deciding whether to change interest rates.
Why had prices risen so fast?
Soaring food and energy bills helped drive inflation up.
Oil and gas were in greater demand after Covid. The war in Ukraine meant less was available from Russia, putting further pressure on prices.
The conflict also reduced the amount of grain for sale, pushing up global food prices.
This effect was compounded in the UK by a shortage of vegetables, which took food inflation to a 45-year high.
Alcohol prices in restaurants and pubs also rose.
How does raising interest rates help to tackle inflation?
The Bank of England has a target to keep inflation at 2%, but the current rate remains double that.
The traditional response to rising inflation is to put up interest rates.
This makes borrowing more expensive, and means some people with mortgages see their monthly payments go up. Some saving rates also increase.
When people have less money to spend, they buy fewer things, reducing the demand for goods and slowing price rises.
Businesses also borrow less, making them less likely to create jobs; some may cut staff.
In August, the Bank increased interest rates for the 14th time in a row, taking the main rate to 5.25%.
It held rates at that level at its two subsequent meetings in September and November.
Announcing the November decision, the Bank said higher interest rates “are working to reduce inflation”.
What happens when inflation falls?
Lower inflation doesn’t mean prices drop – it means they rise less quickly.
The Bank of England has predicted that inflation will drop to about 4.5% by the end of the year and fall further in 2024.
Bank governor Andrew Bailey said it was “crucial that we see the job through” and get price rises back to the 2% target, because people “should trust that their hard-earned money maintains its value”.
In October, the International Monetary Fund (IMF) predicted the UK would have the highest inflation rates of any G7 economy in both 2023 and 2024. As a result, it thought UK interest rates would remain relatively high until 2028.
In January, Prime Minister Rishi Sunak said halving inflation by the end of 2023 was one of the government’s five key pledges.
Are wages keeping up with inflation?
Official figures showed that – on average – regular pay excluding bonuses rose at an annual rate of 7.7% between July and September, compared with the same period a year earlier.
This is higher than the rate of inflation was in the same period (6.7%), which means real wages grew faster than rising prices.
However, rises are starting to slow in some industries, and unions point out that many workers have actually received smaller pay increases, which led to widespread strikes over pay.
The government previously argued that big pay rises could push inflation higher because companies might increase prices as a result.
What is happening to inflation and interest rates in Europe and the US?
Many other countries have also been experiencing a cost-of-living squeeze for similar reasons: increased energy costs, shortages of goods and materials, and the fallout from Covid.
The annual inflation rate for countries that use the euro was estimated to be 2.9% in the 12 months to October, down from 4.2% in September, and its lowest level for more than two years.
As in the UK, the European Central Bank (ECB) has increased interest rates to try to bring rising prices under control.
On 14 September, it raised its key interest rate – the benchmark deposit rate – to 4%, a record high, but this is widely expected to be the last increase for a while.
In the US, inflation was 3.2% in the year to October, down from 3.7% in September.
At its October meeting – as in September – the US central bank kept its key interest rate unchanged between 5.25% and 5.5%. Rates remain at their highest level for more than two decades.
Source: BBC
