British inflation unexpectedly held steady in September, raising the prospect of a Bank of England (BoE) interest rate cut this year and offering some relief to finance minister Rachel Reeves ahead of her budget in November.
Annual consumer price inflation remained at 3.8 per cent for the third month running, its joint highest since the start of 2024, the Office for National Statistics said yesterday.
Price growth in Britain remains the fastest among the world’s rich advanced economies but the Bank of England and most economists polled by Reuters had expected a further rise to 4.0pc.
Inflation in the services sector – closely watched by the BoE as a gauge of underlying price pressures in the economy – stayed at 4.7pc, also below the Reuters poll forecast of a rise to 4.9pc.
Sterling slid by more than half a cent against the US dollar and investors moved to price a 75pc chance of the BoE cutting rates at its December meeting, up sharply from a 46pc probability before the inflation data was published.
“On balance the UK’s inflation problem looks slightly less bad now than it did a few weeks ago,” Luke Bartholomew, deputy chief economist at investment firm Aberdeen said.
Ellie Henderson, an economist at bank Investec, said the year-long climb in British inflation appeared to be over.
“A 3.8pc headline inflation rate is still uncomfortable for the Bank of England – it is nearly double its 2pc inflation target. However we are of the view that this is the peak,” Henderson said.
As well as complicating the BoE’s attempts to support a weakening economy with lower borrowing costs, Britain’s high inflation has added to the government’s huge debt costs at a time when other demands on public spending are rising.
Reeves is likely to increase taxes in her budget on November 26 in order to show jittery investors that she remains on course to meet her fiscal targets, and analysts have warned that some options could push up inflation next year.
Shortly after yesterday’s data was published, Reeves said she was not satisfied and suggested she was preparing measures in her budget to help bring down the cost of living.
“For too long, our economy has felt stuck, with people feeling like they are putting in more and getting less out,” Reeves said in a statement.
“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.”
The International Monetary Fund said last week that Britain’s inflation rate would be the highest among the Group of Seven economies in 2025 and 2026.
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