Inflation begins its long march down, but the high cost of living demands action from the Chancellor at the Budget

While the fall in CPI to 3.6 per cent in October, from 3.8 in September, signals the start of a long drift down in inflation, the cost of living remains high meaning the Chancellor must act at the Budget, according to the Resolution Foundation this morning (Wednesday).

This fall was largely in line with expectations, as past increases in energy prices dropped out of the 12-month window used to calculate inflation. Energy was the most significant factor pushing down on inflation. Meanwhile, food inflation increased again to 4.9 per cent, up from 4.5 per cent last month. The prices of these essential matter more to the lowest-income families who spend over a third more of their budgets on food and energy (22 per cent for the bottom-income decile, compared to 16 per cent for the top-income decile).

The good news is that the Bank of England has said that inflation should now fall steadily back to the 2 per cent target, although it won’t get there until early 2027. But families continue to struggle with the high cost of essentials, particularly energy bills which remain around 40 per cent above levels seen before Russia’s invasion of Ukraine (or around £500 more for the representative household).

As a result, the Chancellor should prioritise bringing down energy bills in next week’s Budget to ease cost of living pressures for low-income families. There are many ways to cut bills, but targeting electricity prices instead of gas would help both family finances and the net zero transition. Here, funding the Warm Homes Discount, Energy Company Obligation, Renewables Obligation and Feed-in Tariff through taxation instead would cut typical energy bills by £160 a year, as well as bringing down inflation by 0.3 percentage points.

James Smith, Research Director at the Resolution Foundation, said:

“Today’s fall in CPI signals we’ve likely passed peak inflation. But while inflation is now expected to drift down, the Bank of England doesn’t expect it to return to the 2 per cent target until early 2027.

“With October’s fall in inflation driven by past energy price rises dropping out of the annual calculation, and the level of food and energy prices remaining stubbornly high, the cost of living crisis is far from over – particularly for the lowest-income families who spend a third more of their budgets on these essentials than those with the highest incomes.

“The high cost of living demands action from the Chancellor at next week’s Budget. Targeted interventions – such as reducing policy costs on energy bills – offer a path to easing cost pressures for families while also accelerating the fall in inflation.”