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A person buys produce from a fruit and vegetable market stall in central London, Britain, August 19, 2022. — Reuters
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LONDON: British inflation fell for the first time since May, official data showed on Wednesday, offering the government some relief ahead of next week’s annual budget and raising the prospect of a December rate cut by the Bank of England.
According to the Office for National Statistics, consumer price inflation eased to 3.6 per cent in October, its highest since January 2024. The decline was in line with forecasts by both BoE and economists polled by Reuters.
Sterling weakened marginally against the US dollar after the data, two-year gilt yields fell and interest rate futures priced in a slightly faster rate cut in 2026. “With inflation now on a steady downward spiral, economic growth is softening, and a significant fiscal tightening could be delivered in next week’s budget,” he said.
The BOE held off on rate cuts in November
The BoE halted its quarterly rate cuts earlier this month and Finance Minister Rachel Reiffs has said she will try to avoid tax and spending measures that could add to inflation in her annual budget on November 26.
“Cost of living costs are still a huge burden on families across the country, and that’s why, in next week’s budget, I will take targeted action to reduce inflation to address the cost of living,” Rios said after Wednesday’s data.
Some economists estimate that the measures announced in last year’s budget, which include increases in the minimum wage, taxes on employers and other income, have increased Britain’s inflation rate by more than one percentage point, the highest among major advanced economies.
Earlier this month, the BOE forecast inflation would remain above its 2.0 percent target through mid-2027, largely because of wage growth that many BOE policymakers believe is faster, driven by much higher productivity growth. Higher labor costs have been felt in much of the UK service sector in particular.
Services inflation declines but food prices rise
Services price inflation, closely watched by BOE as a leader of long-term home price pressures, was at its lowest in October and down from 4.7 percent in September, with household electricity and heating bills and cheaper hotel room prices down from 4.7 percent in October.
Core CPI, which excludes volatile, energy, alcohol and tobacco prices, slowed to 3.5 percent from 3.4 percent expected in October. However, food inflation is expected to peak at 5.3 percent in December, with inflation expected to rise from 4.5 percent to 4.9 percent, weighing on household expectations for future earnings.
Separate figures from the ONS published on Wednesday showed factory-gate prices rose 3.6 per cent over the 12 months, up from 3.5 per cent in September.
A rate cut after its next meeting on December 18 is not a done deal. The central bank’s monetary policy committee voted 5-4 against cutting rates in November. While Gov. Andrew Bailey had indicated he was open to a vote this year if more evidence emerged that price pressures eased this year, Chief Economist Howe Golley said Tuesday he did not expect his view to be boosted by near-term wage increases.
James Smith, economist at ING, said the larger-than-expected decline in services inflation reflected volatility that could be discounted by some policymakers.
