Britain's stubborn inflation held steady for a third consecutive month in September, dimming hopes that the Bank of England will move ahead with an interest rate cut before year-end.
The Office for National Statistics said Wednesday that the annual consumer price index (CPI) was unchanged at 3.8% in the 12 months to September, falling short of expectations for an increase to 4%. It remains nearly double the BoE's 2% target, leaving policymakers in a bind as they attempt to balance inflation control with sluggish economic growth.
"The largest upward drivers came from petrol prices and airfares, where the fall in prices eased in comparison to last year. These were offset by lower prices for a range of recreational and cultural purchases including live events," Grant Fitzner, chief economist at the ONS, said Wednesday. "The cost of food and non-alcoholic drinks also fell for the first time since May last year," he added.
Core inflation, which excludes volatile categories such as food, energy, alcohol, and tobacco, eased slightly to 3.5% from 3.6% in August, signaling that underlying pressures remain persistent. Services inflation, a key gauge for the BoE, stayed high at 4.7%, defying forecasts of a further rise.
Chancellor Rachel Reeves said she was "not satisfied" with the data, adding that "all of us in government are responsible for supporting the Bank of England in bringing inflation down." Reeves is under growing pressure to address cost-of-living challenges in her Autumn Budget on Nov. 26, with analysts expecting possible tax hikes and targeted measures to ease consumer strain.
Economists were divided on whether the central bank will move forward with another rate cut. "Despite softer than expected inflation, the chances of a November rate cut are hanging by a thread, particularly as rate-setters will likely want to analyse the inflationary impact of any measures announced in the Budget before relaxing policy again," said Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.
George Brown, senior economist at Schroders, said the latest data could serve as a "wake-up call for markets." He noted, "Inflation near 4% should serve as a wake-up call for markets, which continue to price in two more rate cuts next year. High inflation is at risk of becoming entrenched in the U.K., due to a combination of disappointing productivity and sticky wage growth." Brown added that the BoE "will keep interest rates on hold until the end of 2026 and we wouldn't rule out its next rate move being upward."
Market reaction was swift. Sterling fell 0.3% to $1.3331 against the dollar and to €1.1485 against the euro, while investors raised the odds of a December rate cut to 75% from 46% before the data release. "A 3.8% headline inflation rate is still uncomfortable for the Bank of England - it is nearly double its 2% inflation target," said Ellie Henderson, an economist at Investec.
