Fall in UK inflation looks like turning point that heralds interest rate cut
After three months on a high plateau, inflation is beginning to ease again,The drop from 3,8% to 3,6% in the October consumer prices index sets the UK on a downward path that reduces the pressure on shoppers, businesses and the government,Never mind that City economists had expected a fall last month.
It appears to be a turning point back towards normality after a topsy-turvy year that everyone wants to put behind them.A little more than 12 months ago the pace of prices growth fell as low as 1.7% and it looked like inflation was beaten, but then came a resurgence in gas and electricity bills and most shockingly for the general public, a return of rocketing food prices.There were global effects on prices from Donald Trump’s tariffs and domestic pressures from government tax increases in the 2024 budget.Rachel Reeves has given strong hints that unlike last year there will be measures in the budget next week to accelerate the fall in prices.
A cut in the 5% VAT rate on energy is the leading contender, but there could be more.On Tuesday night, Reeves lent her support for a competition crackdown on the dentistry industry and vet businesses, both of which have undergone a merger mania, prompting concerns about monopoly pricing practices.The chancellor knows that most governments caught in the inflation spiral of 2022-23 were kicked out of office.She is desperate that high inflation does not get added to the checklist of grievances against Labour at the next election.The Bank of England’s forecasts say inflation is on track to fall to its 2% target by 2027, so the chancellor should be OK.
However, she also wants interest rates to fall, giving a further boost to businesses and consumers.How far the central bank will go to reduce the cost of borrowing is unclear after a deep split among policymakers on the monetary policy committee (MPC).There are members of the nine-person panel who believe the cost of borrowing will need to remain elevated to hit the 2% target.Another camp says interest rates can fall without any impact on prices because there is slack in the economy after a period of rising unemployment.At the MPC meeting earlier this month, the governor, Andrew Bailey, sided with the inflation hawks and wielded the casting vote to keep interest rates at 4%.
Sign up to Business TodayGet set for the working day – we'll point you to all the business news and analysis you need every morningafter newsletter promotionFinancial markets expect him to switch sides at the next meeting in December.Immediately after the inflation figures appeared, investors slightly raised the likelihood of a cut to 82%.As far as they are concerned, the reduction is nailed on.But there will be another inflation figure before policymakers meet again on 18 December, with some economists suggesting November’s reading could go back up again.The ONS will also provide an update on unemployment and wages.
Huw Pill, the BoE chief economist, said on Tuesday that his concerns about high wages feeding into prices had yet to be allayed.He voted to keep rates high at the last MPC meeting and his latest comments appear to keep him inside the hawkish camp.His fellow MPC member Swati Dhingra gave every indication in a speech later in the day that she would be voting for a rate reduction.If these two are any indication of the mood on the MPC, then Bailey is in the spotlight.Reeves knows that if she can use her budget to make meaningful reductions in the cost of living, she could make Bailey’s switch from hold to cut that much easier.
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BREAKING: UK inflation dropped to 3.6% in October, easing pressure on households and providing a boost for Rachel Reeves as the chancellor prepares for her make-or-break budget next week.The Office for National Statistics (ONS) said annual inflation as measured by the consumer prices index cooled for the first time in five months, declining from a peak of 3.8% over July, August and September.Reeves has vowed to cut living costs in her highly anticipated tax and spending statement on 26 November, including measures to bring down the inflation rate to smooth the path for the Bank of England to cut interest rates
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Daly recalled to face Argentina as Borthwick makes six changes to England
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