The UK’s inflation rate climbed to 2.3% in October, marking a significant rise from 1.7% in September, according to the Office for National Statistics (ONS).
The figure exceeded the 2.2% forecasted by economists, reintroducing inflation above the Bank of England’s 2% target.
The unexpected increase complicates expectations of another interest rate cut in December, following the Bank’s recent decision to reduce rates by 25 basis points.
This acceleration in inflation reflects mounting pressures within the UK economy, influenced by rising energy prices and persistent global trade disruptions.
It also underscores the challenge of balancing fiscal and monetary policies as the Labour government navigates its post-election economic strategy.
Energy prices drive UK inflation
The October inflation spike was partially driven by an increase in the regulator-set energy price cap, implemented at the start of the month.
This cap adjustment, designed to protect consumers from extreme price hikes, has led to higher energy costs during the onset of winter.
Analysts predict further price pressures in the months ahead, given the seasonality of energy consumption.
Core inflation, which strips out volatile components such as energy and food prices, also rose to 3.3% in October from 3.2% in September.
This uptick signals broader price pressures across the economy, notably within the services sector.
Service price inflation increased modestly to 5.0%, its lowest rate in over two years, yet still a key contributor to the overall inflation trend.
UK inflation: impact on monetary policy
The inflation data will play a crucial role in the Bank of England’s upcoming interest rate decision on 19 December, particularly as markets adjust their expectations. A further inflation print, due next month, will likely influence policymakers’ actions.
Presently, market participants assign only a 14% probability of an additional rate cut this year, suggesting growing uncertainty about the central bank’s trajectory.
Sterling reacted modestly to the data, trading 0.1% higher against the US dollar at $1.2692 and gaining 0.4% against the euro at €1.20 as of 8:03 a.m. London time.
Meanwhile, UK 10-year gilt yields edged up to 4.491%, reflecting rising borrowing costs amidst inflationary pressures.
Government fiscal strategy under scrutiny
Inflationary challenges coincide with political headwinds for the Labour government, which has faced criticism for its economic stewardship since winning the July election.
Finance Minister Rachel Reeves presented her Autumn budget on 30 October, outlining £40 billion in tax increases to address a fiscal deficit, while loosening debt rules to enable further public spending.
Commentators, including the Office for Budget Responsibility (OBR), warn that these measures may temporarily boost inflation, even as they aim to stabilise growth.
Global factors such as impending US trade tariffs under President Donald Trump’s administration could amplify inflationary risks heading into 2025.
Balancing inflation risks and growth prospects
Economic experts remain divided on whether October’s inflation rise represents a short-term fluctuation or a more persistent trend.
Obstacles such as trade disruptions, labour market tightness, and volatile food and energy prices could sustain inflationary pressures well into 2025.
The Bank of England, faced with these uncertainties, may prioritise caution in its policy decisions.
The combination of domestic fiscal challenges and global economic dynamics leaves the UK navigating a precarious path.
While rising inflation underscores robust demand in some sectors, it also complicates efforts to alleviate cost-of-living pressures for households and businesses alike.
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