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UK inflation fell to 3.6 per cent in October, strengthening the case for the Bank of England to cut interest rates next month to boost a sluggish economy set to be hit by higher taxes in the Budget.
Wednesday’s figure from the Office for National Statistics was in line with the expectation of economists polled by Reuters and down from September’s 3.8 per cent reading.
October’s decline was led by a smaller rise in gas and electricity prices compared with a year ago as well as a drop in hotel prices, the ONS said.
The release of the data comes a week ahead of a Budget from chancellor Rachel Reeves that is expected to include steep tax increases, raising further risks to growth.
The BoE’s Monetary Policy Committee held rates at 4 per cent this month in a tight vote but signalled a cut could come as soon as December if price pressures continued to abate.
Services inflation, closely tracked by BoE rate setters as a gauge of underlying price pressures, fell to 4.5 per cent in October, below economists’ forecasts of 4.6 per cent and down from 4.7 per cent in September.
Pooja Kumra, rates strategist at TD Securities, said that “services inflation continues to move in the right direction” but added that investors would want Reeves to ensure tax rises in next week’s Budget were not inflationary.
Following the data, traders increased their bets on a quarter-point cut in December to 85 per cent from 80 per cent, according to levels implied by swaps contracts.
Core inflation, which excludes energy and food, was 3.4 per cent in October, down from 3.5 per cent in September. Food and drink inflation rose to 4.9 per cent in October, up from 4.5 per cent in September.
In recent months, a divided MPC has had to contend with stubborn inflation and slowing economic growth. The economy grew just 0.1 per cent in the third quarter of the year, the slowest pace since late 2023.
The prospect of the MPC reducing borrowing costs by another quarter point in December will offer some comfort to Reeves as she pledges to bear down on inflation in an effort to pave the way for further interest rate cuts.
Responding to the figures on Wednesday, Reeves said: “This fall in inflation is good news for households and businesses across the country, but I’m determined to do more to bring prices down.”
The pound was flat against the dollar at $1.314 following the release of the figures.
Lee Hardman, a senior currency analyst at MUFG, said: “We think that this report should keep BoE on course to lower rates in December.”
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