Inflation plummeted to 4.6% in October, down from 6.7% in September, following a reduction in the energy price cap and easing food and drink inflation.

This is slightly lower than the 4.8% that economists forecast, and marks the smallest increase in consumer prices in two years, although inflation remains more than double the government’s 2% target. Core inflation, which strips out more volatile food and energy prices, eased to 5.7%% in October, down from 6.1% in September.

Meanwhile, the Retail Prices Index (RPI) measure of inflation, which includes housing costs, fell to 6.1% in the 12 months to October, down from 8.9% in September.

Food and non-alcoholic drink inflation slowed to 10.1% in October, down from 12.1% last month. However, the price of food last month was still around 30% higher than it was in October 2021.

Alice Haine, personal finance analyst at Bestinvest, the DIY investment platform, said: “The battle against high prices is finally gaining ground – with headline CPI inflation plunging below 5% for the first time since October 2021 delivering respite to households whose finances have been battered by the cost-of-living crisis over the past two years.

“The decline to 4.6% in the 12 months to October from 6.7% in September was largely driven by a sharp drop in energy bills compared to last year – when the Government’s Energy Price Guarantee capped the typical bill at £2,500 to protect households from soaring gas and electricity prices – and retreating food inflation amid easing industry pressures and escalating aisle wars as major supermarkets ramp up discounts and bolster their loyalty schemes in a bid to win market share.”

Learn about ways you might be able to reduce your food bills in our guide 21 ways to save money on your food bills.

Energy prices fell from an average of £2,074 to £1,834 in October for the typical household, following Ofgem’s announcement of the new Energy Price Cap, but they remain far higher than two years ago.

You can find out whether you might be eligible for support with your energy bills in our guide Are you eligible for help with heating costs?. Our articles Energy saving tips: how to reduce your bills and What can you do if you can’t pay your energy bills? may also help.

Steep mortgage payments remain one of the biggest issues for many households, although recent weeks have seen several lenders start to reduce some of their mortgage rates. Read more in our article Two-year fixed mortgage rates fall below 5% for the first time in five months.

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What inflation means for you

High inflation increases the cost of our general living expenses, making it even harder for those on low incomes to make ends meet.

However, salaries are finally outstripping the rate of inflation, although this has prompted concerns that rising prices will take longer to ease. Earnings growth without bonuses to September was 7.7% according to the ONS, which is much higher than the current inflation rate at 4.6% and means real wages are now in positive territory.

Inflation and your pension

Although October’s inflation rate is a significant move in the right direction, it is actually September’s inflation rate that is considered most important by many. That’s because the increase in prices over the year to this point is usually used to calculate the rate at which certain allowances and benefits, including the State Pension, are increased the following April. Under the ‘triple lock’ guarantee, the State Pension is guaranteed to rise by the highest of September’s inflation figure, earnings growth, or 2.5%. Soaring wages have outstripped inflation, so it looks like the State Pension will increase by 8.5% next April. You can find out more about this in our guide What is the pension triple lock?

Easing inflation is positive news for those with workplace and private pensions, as it boosts the purchasing power of your savings. Becky O’Connor, director of public affairs at PensionBee, said: “A fall in inflation of this scale is sorely needed. Such a drop could mark the beginning of the end of the cost of living crisis, although prices are still high and the painful effects of this difficult period will continue to be felt for some time.

“For those trying to preserve the long term value of their life savings, including their pension, returning to lower inflation is absolutely vital. Retirees have been struggling to make their pensions last in the face of the recent bout of ultra-high inflation; while workers trying to boost their future pension pot have faced an uphill battle to maintain the real future value of their savings. A return to more normal economic conditions will be a boost to financial resilience and security and may enable people to start reprioritising planning, rather than just getting by.”

What does it mean for interest rates?

The Bank of England has raised the base rate fourteen consecutive times since December 2021 to try to dampen inflation, but the Bank’s Monetary Policy Committee decided to leave rates unchanged at 5.25% in November as inflation eased. Higher interest rate rises are bad news for borrowers, as they mean steeper mortgage costs for those on variable or tracker deals. Those currently protected by fixed rates may face a potential payment shock when their current mortgage deal ends and they want to remortgage. If you’re worried about the impact of rate increases, read our articles What can you do to prepare for an interest rate rise? and Should I fix my mortgage now or wait?

Sarah Coles, head of personal finance, Hargreaves Lansdown, said: “There would need to be evidence of ‘persistent’ inflationary pressures for rates to rise any further, and there was ‘little news’ on this front. It means it may well tolerate slightly higher inflation without a rate rise – so there’s a strong likelihood that interest rates will stay put well into 2024.

“There are no guarantees. If oil prices spike again, or wage rises steam ahead far more dramatically, we could see another rate rise whisked out of the back pocket. Meanwhile, if the economy is even weaker than expected, it could accelerate plans for cuts. However, if cuts progress as the Bank expects, they’re going to move at glacial pace. The Bank expects interest rates to be at 5.1% in the last three months of next year and 4.2% by the same period of 2026 – which is hardly a dramatic overnight shift.

“With rates on hold, variable mortgages will tend to stay put. Fixed rates, meanwhile, could fall very slightly, as any lingering doubts over whether this is the top of the rate rise cycle start to recede. However, we’re not expecting any big moves until the market starts to expect a rate cut – which is likely to be months down the track.”

Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for somewhere to start, you can speak to a Rest Less Mortgages advisor and get high quality advice on residential, retirement interest-only, equity release and buy-to-let mortgages.

Impact on savers

Easing inflation and higher interest rates benefit savers as they make it possible to generate real returns, although the top rates have started to be pulled from the shelves in recent weeks. If you’re trying to save so that you have a financial buffer in place to cover rising costs, our articles How to build an emergency fund and Best instant access savings accounts may come in handy.

Haine said: “The biggest gainers from softening inflation are savers who can now enjoy a positive return on their nest eggs. With the top-easy access accounts offering rates of up to 5.22% and the top one-year fixes coming in at up to 5.91%, savers can snap up a new deal that surpasses price rises.

“They should move fast, however, as this may be the peak for saving rates. As the economic outlook changes, the shelf life on the best deals is expiring fast, so those that still want bumper returns on cash should shop around now before the top rates disappear completely.”

High savings rates come with risks of their own, however, as more people may unwittingly breach their annual Personal Savings Allowance. First introduced in 2016, when savings rates were much lower than now, the allowance has remained frozen since then with basic rate taxpayers entitled to £1,000 tax-free cash interest on savings outside of ISAs and those paying the higher 40% income tax rate awarded a £500 allowance. For additional rate taxpayers subject to 45% income tax, there is no Personal Savings Allowance at all. You can read more about the Personal Allowance in our guide What is the Personal Savings Allowance?

Ms Haine said: “Nobody wants to pay tax on their rainy-day fund, so savers should consider more tax-efficient options such as a Cash ISA where savers can stash up to £20,000 each year without incurring tax on interest or capital gain. Remember, the £20,000 applies across all types of ISA, so a savvy saver could store a portion of their savings in the highest-interest Cash ISA they can find and deposit the rest in a Stocks & Shares ISA to take advantage of longer-term investment returns.”

You can learn more about inflation and the impact it has on your finances in our guide What does inflation mean for my money? If you’re looking for ways you might be able to reduce your outgoings, read our articles How to save money – 21 money saving tips and Seven ways to save on your household bills.

Free financial support services

If you’re worried about inflation and your debts are starting to spiral out of control, contact Citizens Advice to help you find a way forward. You can speak to an adviser through its national phone service Adviceline on 0800 144 8848 if you’re in England, 0800 702 2020 if you’re in Wales, 0800 028 1456 if you’re in Scotland and 0808 223 1133 if you’re in Northern Ireland. Alternatively, contact any of the following specialist debt advice charities:

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