CPI inflation falls to 4.6 per cent in October

UK consumer price inflation fell to 4.6 per cent in October, according to UK Finance's Household Finance Review for the third quarter of 2023¹. The review, written by Lee Hopley, Director of Economic Insight and Research, and published in December 2023, said the main contributor to the fall was a reduction in the energy price cap¹.

The review describes the October figure as good news on three counts: for the Bank of England, as it moves closer to its two per cent target; for the government, which it says met its own commitment to halve inflation by the end of 2023; and for consumers, as a signal that cost-of-living increases are starting to ease¹. It notes, however, that other measures which may better indicate persistence did not fall by the same magnitude, with core inflation at 5.7 per cent and services inflation at 6.6 per cent on an annual basis¹.

Food prices were still up by around ten per cent in the year to October, and the review states they have risen by more in the last two years than in the preceding fifteen¹. An Office for National Statistics public opinion and social trends survey cited in the review found around half of households reported an increase in their cost of living in the previous month, down from over three-quarters a year earlier¹.

The Bank of England's Monetary Policy Committee voted to retain Bank Rate at 5.25 per cent at both its September and November meetings, with the decisions not unanimous¹. The review says the overall message was that consideration of interest rate cuts was still some way off¹.

The review also sets out conditions in the mortgage market. Lending to both first time buyers and home movers had fallen year on year in every month since December 2022, and the review says indications were that the fourth quarter would show a further contraction¹. It reports that customers with lower incomes were putting down deposits equal to twice their annual income to meet affordability requirements¹. Mortgage refinancing remained strong in the third quarter, with affordability pressures and competitive retention deals driving more customers to take a product transfer with their existing lender¹.

Households continued to run down savings to cover increased monthly bills, though the review says there was at that stage no sign of increased reliance on overdrafts or credit cards to cover shortfalls¹. Arrears rose by more than expected in the third quarter, with signs of further increases ahead, but cases remained mainly older mortgages, with very few mortgages underwritten since FCA-mandated stress tests came into force entering arrears¹. Possessions fell slightly and remained at historically very low levels, and the review says no possessions related to arrears newly arising amid cost-of-living and interest rate pressures were expected until the end of 2024 at the earliest¹.

Why it matters for households

The October reading of 4.6 per cent is the headline measure of how fast prices are rising, not a fall in prices themselves. Food prices were still around ten per cent higher than a year earlier, and the review notes that price increases seen through the cost-of-living crisis are largely baked in, excluding energy costs, which remain volatile¹. Energy bills are directly affected by the price cap, and the October fall in inflation was attributed mainly to a reduction in that cap¹.

For mortgage borrowers, the review describes weak lending across almost every segment, most acutely at the tighter end of affordability, including higher loan-to-value ratios and income multiples¹. Households remortgaging faced affordability pressures, and more chose a product transfer with their existing lender¹. Savers drawing down balances to meet monthly bills is reported as a continuing trend, while arrears rose and were expected to rise further¹.

What happens next

The review states that the Bank of England revised down its expectations and predicted no GDP growth through 2024, and that the MPC is likely to hold rates at current levels in the near term¹. It says the full effects of past rate rises on GDP are expected to be felt only in 2025¹. On possessions, it says no cases related to arrears newly arising from cost-of-living and interest rate pressures are expected until the end of 2024 at the earliest¹. The review also records autumn statement measures including a 2p cut to the main rate of employee National Insurance contributions, extending the mortgage guarantee scheme to June 2025, uprating working age benefits by inflation and further support for job seekers¹.