UK inflation at 3.6% in October, boosting chance of December rate cut
Regent Street in London celebrates the Christmas season on November 13, 2025 in London, England.
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The UK’s inflation rate fell to 3.6% in October; This was one of the last major economic data releases ahead of the government’s Autumn Budget next week.
Economists polled by Reuters had expected a rate of 3.6% in the twelve months to October, down from 3.8% in September.
Core inflation, which excludes energy, food, alcohol and tobacco, rose 3.4% in the year to October from 3.5% in September, according to the latest figures from the Office for National Statistics.
“Inflation eased in October, driven by gas and electricity prices rising less than last year following changes to the Ofgem energy price cap. Hotel costs have also fallen this month, with prices falling this month,” ONS chief economist Grant Fitzner said on Wednesday.
These downward pressures were only partially offset by rising food prices following the slump in September, while the annual cost of raw materials to businesses continued to rise.
Responding to the latest data, UK Chancellor of the Exchequer Rachel Reeves said: “This fall in inflation is good news for households and businesses across the country, but I am determined to do more to bring prices down.”
“That’s why I’ll be holding fair elections in next week’s budget to deliver on the public’s priorities of shortening NHS waiting lists, cutting the national debt and lowering the cost of living,” he said in comments published by the Treasury.
Sterling Immediately after the announcement, it remained flat against both the US dollar and the euro. Meanwhile, yields on UK government bonds, known as gilts, were marginally lower across the maturity curve.
The UK government has the highest long-term borrowing costs among the G-7 countries, and the yield on the 30-year gold trade is well above the critical 5% threshold.
Budget followed by Christmas cut
The Bank of England had previously predicted inflation would reach 4 per cent in September (twice the central bank’s target), then cool gradually towards next year.
Economists expect the central bank to cut interest rates at its next meeting in December as inflation cools and growth remains stubbornly low; UK economy Preliminary figures released last week showed weak growth of 0.1% in the third quarter.
But for now, all eyes are on the UK Treasury Autumn Budget due to be released on 26 November, and analysts want to see the size of expected tax increases that could be disinflation-busting.
“Looking ahead, the Autumn Budget will likely mark the next most significant inflation forecast update. Speculation on lower energy bills, indexation costs, tariffs and food prices is still rife,” Deutsche Bank’s UK chief economist Sanjay Raja said in his analysis ahead of the inflation data. he said.
“We expect the Chancellor to introduce some modest measures to bring prices down on November 26. This will give us a good idea of where inflation will be in 2026,” he said.
Help Reeves
The latest inflation reading will provide “much-needed positive relief” for Reeves, according to Brad Holland, director of investment strategy at JP Morgan Personal Investing.
“While the slow pace of price increases is welcome news for many – particularly for all UK consumers preparing for festive spending – the UK economic picture remains mixed,” he said in emailed comments. he said.
Holland said the latest inflation data would likely push the central bank towards a pre-Christmas interest rate cut at its December 18 meeting.
“With the latest data following the weak growth figures announced last week, calls for action are increasing day by day. Markets are pricing the possibility of a 0.25% interest rate cut in December as 80%, and the data shows that this is probably coming,” he said.
Chancellor Rachel Reeves poses with a red box outside 11 Downing Street on October 30, 2024 in London, England. This is the first Budget presented by the new Labor government and Chancellor of the Exchequer Rachel Reeves.
Dan Kitwood | Getty Images News | Getty Images
Schroders senior economist George Brown said although the latest data tipped the scales towards a December rate cut, subsequent rate cuts would largely depend on the contents of the Chancellor’s red box.
“If VAT and green taxes were removed from household energy bills, inflation could fall by up to half a percentage point,” he said in emailed comments.
“But we remain concerned that broader price pressures will persist. Wage growth is still well above a pace consistent with the target, particularly given persistently weakening productivity. The Bank [of England] “Given the increased risk of high inflation becoming entrenched, caution must be taken.”
