British inflation unexpectedly held steady in September, strengthening expectations of a potential Bank of England interest rate cut later this year and providing some respite for finance minister Rachel Reeves ahead of her November budget.
The Office for National Statistics reported on Wednesday that annual consumer price inflation remained at 3.8% for the third consecutive month — its joint highest level since early 2024.
While price growth in the UK continues to outpace that of other major advanced economies, both the Bank of England and economists surveyed by Reuters had forecast a slight increase to 4.0%. Meanwhile, inflation in the services sector — a key indicator of underlying price pressures closely monitored by the BoE — held steady at 4.7%, below expectations of a rise to 4.9%.
‘THIS IS THE PEAK,’ ECONOMIST SAYS
Following the data release, sterling slipped by more than half a cent against the US dollar, while investors raised the odds of a December rate cut by the BoE to 75%, up from 46% before the figures were published.
“On balance, the UK’s inflation problem looks slightly less severe now than it did a few weeks ago,” said Luke Bartholomew, deputy chief economist at investment firm Aberdeen.
Ellie Henderson, an economist at Investec, agreed that Britain’s year-long inflation climb may have reached its turning point.
“Although a 3.8% headline inflation rate remains uncomfortable for the Bank of England — almost double its 2% target — we believe this marks the peak,” Henderson said.
Britain’s stubbornly high inflation has not only constrained the BoE’s ability to ease monetary policy but has also intensified pressure on public finances, driving up government debt costs amid mounting spending demands.
