Inflation dropped below the Bank of England target rate last month for the first time since April 2021, according to new figures.

The Office for National Statistics (ONS) said Consumer Prices Index (CPI) inflation fell to 1.7% in September, from 2.2% in August.

It was lower than expected, with analysts having predicted a reading of 1.9% for the month.

The September figure is used by the Government to decide a number of tax and spending changes for next year, and means UK state benefits will rise by 1.7% next year.

Read More:

It also confirms that state pensions will increase by 4.1% next April, due to the triple-lock policy.

ONS chief economist Grant Fitzner said: “Inflation eased in September to its lowest annual rate in over three years.

“Lower airfares and petrol prices were the biggest driver for this month’s fall.”

Darren Jones, Chief Secretary to the Treasury, said: “It will be welcome news for millions of families that inflation is below 2%.

“However, there is still more to do to protect working people, which is why we are focused on bringing back growth and restoring economic stability to deliver on the promise of change.”

The ONS revealed that motor fuels and lubricant prices were significantly lower, dropping by 10.4% in September compared with the same month a year earlier.

Air travel costs also dragged down on the inflation rate, as lower air fares due to post-summer sales helped to drive a 5% fall in the category.

However, households witnessed the first acceleration in food and non-alcoholic drink inflation since March 2023 last month.

Food and drink inflation rose to 1.9% for the month from 1.3% in August, amid stronger price increases for milk, cheese, eggs and fruit.

Megan Davies from the Stop the Squeeze campaign said: “Lower inflation means nothing to those heading into the winter with cold homes and empty cupboards. We know that the price of essentials like energy, food and rent are still sky high, and that for so many families, the money coming in still isn’t stretching far enough.

“We need a future-proof cost of living plan that gets to the root of the problem, and this Budget is a chance for the Government to take decisive action. That means boosting incomes, ensuring essentials are affordable, and fixing our broken tax system by bringing in higher taxes on wealth.” 

Neil Rudge, chief banking officer for commercial at Shawbrook, said: “The general price level of goods continued to ease/stabilise in September, edging closer to the Bank of England's 2% target. This is encouraging news for SME leaders, who thrive in a stable macro environment. Whether this will prompt the Bank of England to cut rates more aggressively, as Governor Bailey hinted earlier this month, remains to be seen. However, with prices moving in the right direction, it's likely only a matter of time before borrowing costs fall further.

“That said, small businesses will have plenty on their minds with the upcoming budget looming. Both owners and employees will be watching closely for any announcements that could affect their operations. At the same time, caution remains in the outlook for energy prices, especially with rising geopolitical tensions in the Middle East. Any disruption in energy markets could lead to renewed inflationary pressures, posing additional challenges.”