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UK inflation remained unchanged at a lower-than-expected 3.8% in September, providing a slight reprieve for the Bank of England (BoE) as it faces tough decisions over when to reduce interest rates again.

The figure from the Office for National Statistics (ONS) was below the 4% forecast by both the BoE and economists polled by Reuters. It marked no change from the 3.8% readings in August and July.

According to the ONS data, the annual inflation rate for food and non-alcoholic drinks dropped to 4.5% in September, down from 5.1% in August. This marks the first slowdown in food price inflation since March.

However, transport costs rose by 3.8% in the year to September, up from 2.4% in August. This increase was largely due to higher airfares, while diesel prices remained relatively stable.

The average price of petrol fell by 0.2p between August and September to an average of 134p a litre in September, but last year prices fell by 5.5p a litre. Diesel prices were down by 0.4p a litre to 141.8p.

Air fares fell by 28.8% between August and September, the third-largest September drop since the collection of airfares data changed from quarterly to monthly in 2001. However, the price of flights fell by 34.8% a year earlier, which was the largest September drop since 2001.

ONS chief economist Grant Fitzner said: “A variety of price movements meant inflation was unchanged overall in September.

“The largest upward drivers came from petrol prices and airfares, where the fall in prices eased in comparison to last year.

“These were offset by lower prices for a range of recreational and cultural purchases including live events. The cost of food and non-alcoholic drinks also fell for the first time since May last year.

“Meanwhile, the annual rise in the cost of goods leaving factories continued to increase, driven by higher food prices.”

The data is crucial for the BoE’s Monetary Policy Committee (MPC), which has been striving to bring inflation closer to its 2% target without derailing economic growth. However, the International Monetary Fund (IMF) recently warned the BoE against lowering rates prematurely, stressing the need to control inflation before easing monetary policy further.

Economists had largely expected the inflation rate to rise to 4%, after holding steady at 3.8% for both August and July. The BoE’s forecast for September had been in line with this expectation, with inflation anticipated to remain at 4% before gradually easing over the next few years.

The IMF, in its latest projections, cautioned that the UK would experience the highest inflation rate among the G7 nations in both 2025 and 2026. This outlook complicates the BoE's efforts to cut interest rates in a bid to support the UK’s sluggish economic recovery.

Chancellor Rachel Reeves said: “I am not satisfied with these numbers. For too long, our economy has felt stuck, with people feeling like they are putting in more and getting less out.

“That needs to change. All of us in government are responsible for supporting the Bank of England in bringing inflation down. I am determined to ensure we support people struggling with higher bills and the cost of living challenges, deliver economic growth and build an economy that works for, and rewards, working people.”

The chancellor told the Financial Times that she was determined to get a grip on borrowing and would take steps in her budget to cut household bills, creating space for further BoE rate cuts in the coming months.

“There will be targeted action in the budget around prices because I want to bring down the cost of living for families,” Reeves said. “And I want to see interest rates, which have gone down five times in the last year and a bit, come down further.”

The chancellor is widely expected to temporarily remove VAT on domestic energy bills in a move that would save the average household £86 per year.

For now, the central bank is facing an intricate balancing act. Having initially expected inflation to reach 4% in September, it is now bracing for a more gradual decline, with the 2% target not expected to be reached until the second quarter of 2027.

Although inflation remained steady, pressures on consumer prices persist, driven by a mixture of factors. Food prices have risen, in part because of climate change, while energy costs have fallen more slowly than expected, contributing to persistent cost-of-living pressures.

The UK economy’s inflationary pressures will probably continue to influence the BoE's decision-making for the foreseeable future. With inflation still well above target, economists predict that the MPC will hold off on any rate cuts for now, with no reduction expected at its next meeting on 6 November.

Paul Dales, chief UK economist at Capital Economics, said: "We doubt this will prompt the Bank of England to cut interest rates from 4% in November. But it increases the chances of the next cut happening by February in line with our forecast and it supports our view that interest rates will be reduced to 3% next year.

"What’s more, this will probably be the peak in inflation. Our forecast is for CPI inflation to fall to 3.5% or below in October, not least due to the declines in utility and fuel prices that we already know about. Food price inflation may yet rise further, perhaps back above 5.0% by December, but there are … good reasons to expect it to fall back next year.

"And if we’re right in thinking that weak employment will significantly weigh on wage growth next year, then CPI inflation may surprise most people by falling to 2.0% by the end of next year."

Another interest rate reduction is now fully priced in by February, compared with March before the inflation figures, according to interest rate futures.

Pieter Reynders, partner at McKinsey & Company, said: “Inflation continues its zig zag path, holding steady at 3.8%, but remains significantly above the 2% target. Core inflation however was slightly below last month’s figure at 3.5%, which is a small but welcome step in the right direction.

“Food inflation continues to outstrip overall CPI at 4.5%, though that’s down from 5.1% last month, Consumers will still be noticing increased costs in their weekly shop, with transport costs, including motor fuels and airfares, also adding to household strain.

“While consumer confidence is fragile, it is not absent. Our latest research finds that 71% of consumers plan to spend the same or more than last year on their 2024 holiday shopping*, signalling that spending intentions are holding firm despite ongoing pressures.

“As uncertainty persists, businesses will need to monitor economic signals closely, plan for multiple scenarios, and tailor strategies to the distinct spending priorities of different demographics and region.”