UK inflation accelerated more than expected in October to far exceed the Bank of England’s 2% target, a rebound that investors saw as further dimming the odds of further interest rate cuts in the coming months.
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(Bloomberg) — U.K. inflation accelerated more than expected in October to far exceed the Bank of England’s 2% target, a rebound that investors saw as further dampening the odds of further interest rate cuts in the coming months.
The Office for National Statistics said on Wednesday that consumer price inflation rose to 2.3% from 1.7% in September after a jump in energy bills. It was higher than the Bank of England and private sector economists’ expectations of 2.2%.
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Services inflation – which is closely monitored by rate setters for signs of domestic pressures – remained high at 5%, in line with the Bank of England’s forecast and up from 4.9% in September.
These numbers are likely to reinforce the British central bank’s cautious approach to reversing 14 consecutive increases in interest rates amid increasing inflationary threats at home and abroad. This is the first indication of an expected rise in inflation over the next year.
The inflation release has prompted traders to scale back their bets on lower interest rates in the coming months. The market now expects only two quarter-point declines in 2025, with a 40% chance of a third occurring. Earlier this month, three sales were fully priced.
The pound jumped after the report. The pound sterling is trading 0.2% higher at $1.2702, rebounding further from the lowest level in six months last week.
James Smith, research director at Decision Research, said this was a “very disappointing release on inflation all round”. “It doesn’t encourage us to think there are any quick rate cuts coming. Inflation remains very difficult,” he told Bloomberg Radio.
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It was the biggest rise in headline inflation between months since October 2022. The Bank of England expects the rate to reach nearly 3% by the third quarter of next year as the expansionary budget adds to the inflationary drive caused by last year’s fall in energy prices. From the annual accounts.
Inflation rose due to a 10% increase in the maximum energy prices for UK households in October, compared to a decline the previous year.
While Bank of England policymakers cut interest rates for only the second time earlier this month, they have signaled a “gradual” approach to future cuts. Officials signaled that uncertainty over dual inflation threats from the Labor government’s first budget and Donald Trump’s election win will keep them cautious about policy regardless of the data in the coming months.
Speaking to lawmakers on Tuesday, Governor Andrew Bailey pointed to persistent utility inflation and “a number of risks that exist” for his cautious stance.
“A gradual approach to monetary policy deregulation will help us monitor how this plays out, along with other risks to inflation expectations,” Bailey said of the impact of higher payroll taxes on employers.
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What does Bloomberg Economics say…
“The larger-than-expected rise in CPI inflation and flat price pressure in the services sector are the most eye-catching parts of the October CPI release. But a look beneath the surface suggests that domestic inflation is falling, albeit slowly. This should give the Bank England is confident to continue lowering interest rates gradually over the course of 2025.
—Ana Andrade and Dan Hanson, economists. Click to read the station’s reaction
The Bank of England believes Chancellor Rachel Reeves’ fiscal plans may fuel inflation by raising costs for businesses and boosting borrowing to pay for public investment.
The uncertain global backdrop is another reason for caution ahead of a potential trade war sparked by Trump’s return to the White House. While tit-for-tat skirmishes over tariffs may lead to higher prices, they may also be anti-inflationary if the global economy cools and trade is diverted.
“With the Budget set to boost growth and inflation next year, there is little reason for the Bank to deviate from its only gradual schedule of interest rate cuts any time soon,” said Luke Bartholomew, deputy chief economist at Aberdeen.
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Services inflation also remained high due to restaurant and hotel prices, and a 6.3% month-on-month increase in airfares – the biggest jump for October since records began in 2001, the ONS said.
Commodity prices, which have been in contraction since April, are trending toward growth, falling just 0.3% year-on-year in October. The Trump administration could increase global commodity inflation if it sparks tit-for-tat skirmishes over tariffs.
Separate figures showed that pipeline inflation pressures remained weak, with fuel and raw material costs for manufacturers rising a smaller-than-expected 0.1% in October and production prices unchanged. Both were below the previous year’s levels, affected by lower crude oil prices.
(Adds market reaction and context)
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