UK inflation declines for first time in 5 months

UK inflation subsides leaving the door open for a December rate cut – Charles Stanley on inflation

Rob Morgan, Chief Investment Analyst at Charles Stanley 

UK inflation subsides leaving the door open for a December rate cut

Evidence the UK’s inflation problem is subsiding more swiftly continues to mount with CPI coming in at 3.6% year-on-year for the month of October. This is significantly lower than the near-term plateau of 3.8% recorded in July through to September, all but sealing the deal for a December interest rate cut from the Bank of England.

Encouragingly, core CPI rose 3.4%, the slowest rate since March, and services inflation undershot Bank of England expectations slightly at 4.5%.

There will be palpable relief in Threadneedle Street, and in Westminster, that inflation is now falling back having not breached the 4% level. The direction of travel should now continue into next year, in the absence of any surprises, allowing further cuts that relieve the pressure on households and businesses.

What does it mean for interest rates?

The recent rebound in UK price rises was a speedbump rather than a roadblock. Now we are on the other side of the hump, the BoE has the green light for the next rate cut at its December meeting.

Other data is conducive to an interest rate reduction too. A significant slowdown in GDP for the third quarter indicates the economy has decelerated following a relatively bright start to the year. Meanwhile, cracks in the labor market have widened with unemployment ramping up to 5%, wage growth moderating, and hiring intentions dropping off.

It’s a picture of fading economic resilience that adds up to a 0.25% base rate cut in December with only the Budget standing in the way next week. And an inflationary curveball from the Chancellor’s fiscal announcements seems unlikely with lessons learned from last time around.

Could the Budget push up inflation again?

An increase in employer national insurance from April undoubtedly flowed into business costs and then onto consumers, so the Chancellor will be keen to avoid any further policies that further ignite price rises and weigh on growth.

She will also be leaning into less inflationary measures to ease the pressure on household finances. But it’s still a tightrope to walk with an economy in a fragile state. Targeted raids on income tax, residential property, banks and gambling companies will likely be the order of the day to help fill the fiscal hole without upsetting the growth applecart.

Further out, a fiscal tightening from the Budget that minimises any inflationary impact should allow the Bank of England to make further cuts in the first few months of next year, helping support a weakening economy.

After three months stuck at 3.8%, UK inflation finally managed to drop to 3.6% in October, the first decline in five months and a sign that the disinflation trend may be regaining momentum.

Core inflation, which excludes volatile food, energy, alcohol, and tobacco components, also edged lower to 3.4%, suggesting that underlying price pressures are gradually easing. While the drop was modest, and below analyst forecasts, it reinforces the view that inflation has peaked and is slowly moving closer to the Bank of England’s 2% target.

Food and non-alcoholic beverage prices rose slightly, climbing from 4.5% to 4.9% year-on-year, indicating that households are still feeling pressure in essential spending categories. Service-sector inflation also remains sticky, which will likely keep the BoE cautious about declaring victory over price growth too soon.

Overall, the October data has painted a mildly encouraging picture, one that suggests that inflation is cooling, but progress remains uneven. For the Bank of England, this easing provides some breathing room to start cutting again in December, to which markets are currently assigning an 80% probability.

In markets, the report was greeted with quiet optimism: sterling eased slightly, gilt yields dipped on expectations that the BoE’s next move will be a cut, and UK equities saw some moderate upside after the release despite the heavy selloffs faced over the past few days.

In short, the figures suggest that inflation’s grip on the UK economy is slowly loosening, but the path back to target will likely remain gradual and bumpy.

FTSE 100 daily chart

Past performance is not a reliable indicator of future results.

A damp outlook for sterling following latest inflation figures

Commenting on the latest UK inflation figures, Neil Wilson, Investor Strategist at Saxo UK says: “It is likely that inflation has peaked and this ought to provide ample cover for the Bank of England to press on with rate cuts come December. Given the expected fiscal tightening, which will deliver a contractionary impulse to the economy, the Bank should be leaning towards more cuts. Weakness in the labor market and the broader economy is likely to worsen, at least in the near term. However, the MPC will be mindful about potential inflation-inducing tax hikes from the Chancellor now that the broad-based income tax hike seems to no longer be an option. For sterling, it’s a damp outlook as it faces a case of currency-toxic mix of fiscal tightening, economic backsliding and monetary loosening.”

Ben Thompson, Deputy CEO, Mortgage Advice Bureau:

“The news that inflation has fallen to 3.6% provides the housing market with a much needed shot of confidence, boosting hopes for a final base rate cut of the year in December.

“This cooling of price pressures is the clear evidence the Bank of England needed. It removes the pressure for further rate hikes and shifts the conversation firmly towards when, not if, they can begin to cut the main interest rate.

“With the Autumn Budget just around the corner, there is now more room for manoeuvre. The Government must still however ensure spending decisions do not risk reversing this positive trend, and that is a finely balanced objective.

“Amidst this relief, it’s vital to focus on the bigger picture. The housing market has reset compared to three years ago: property prices are cheaper, borrowing power has vastly improved, and affordability is quietly recovering.

“Our data confirms this opportunity: the average deposit required to buy a home has decreased by 4.04% (down to £57,389) year-to-date, while average borrowing power is up 3.37% (£199,328). Essentially, if you need to move, now is not the time to delay your homebuying plans, especially as there is a lot of stock for sale in many parts of the UK right now.”

“We get that the mortgage market is complicated. That’s why a broker is your essential guide, cutting through the confusing jargon and economic turmoil to lock-in the right deal for you, and at the right time.”

Commenting on inflation falling doing little to shift ‘wait-and-see’ mode, Daniel Austin, CEO and co-founder at ASK Partners, said: “With inflation falling, today’s figures provide some much-needed relief. Yet with global volatility still high and domestic policy direction uncertain ahead of the Autumn Statement, all eyes will be on whether the MPC holds firm on rates next month. For homeowners and prospective buyers, lower inflation raises hopes that cheaper borrowing is edging closer, but elevated fixed-rate mortgages mean any real easing in monthly payments remains some way off. Progress is clear, but inflation is unlikely to return to target this year, keeping household confidence fragile and mortgage pressures elevated.

“In property, cooling inflation may ease some of the gloom, but it does little to shift the ‘wait-and-see’ mindset now embedded across the market. Buyers remain cautious, while developers continue to pause schemes amid unclear fiscal plans, fluctuating build costs and wider economic uncertainty. The proposed reduction in affordable housing requirements to 20%, alongside a faster planning route, could improve viability, particularly in London, but higher financing costs and tight margins are still constraining activity. Further planning flexibility and temporary levy relief would help unlock stalled sites, but demand-side measures will also be needed, from first-time-buyer support to targeted stamp duty reform.

“Resilient niches such as co-living, build-to-rent and storage remain bright spots, attracting capital thanks to structural undersupply and dependable demand. But a clear and sustained fall in inflation is the real catalyst for broader investment appetite. If easing inflation ultimately allows the Bank to begin cutting rates, momentum could return quickly. Until then, only the most agile investors will be positioned to capitalize on a cooling but opportunity-rich market.”

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