UK Inflation Holds at 18-Month Low, Raising Speculation of Interest Rate Hike

The Office for National Statistics attributed the absence of a decline in the annual inflation rate primarily to a rise in petrol prices between August and September.

In a surprising turn of events, the United Kingdom’s consumer price inflation (CPI) has held steady at a low of 6.7% in September, marking an 18-month low.

This figure remains the highest among major advanced economies, according to official data released on Wednesday. This unexpected trend is fueling speculations of a potential increase in interest rates.

The Office for National Statistics attributed the absence of a decline in the annual inflation rate primarily to a rise in petrol prices between August and September.

However, other key indicators, such as core inflation and services prices, which are closely monitored by the Bank of England, also displayed resilience.

This suggests that some policymakers are growing concerned about sustained price pressures over the long term.

Ian Stewart, the chief economist at Deloitte, commented, “Progress in bringing inflation down is proving slow.

The persistence of underlying inflation and service price pressures suggests that interest rates are likely to remain close to their current levels for much of the coming year.”

The financial markets reacted swiftly to the data, with the British pound gaining strength while government bond prices fell.

Investors seem to be leaning towards the likelihood of another interest rate hike by the Bank of England, though the exact timing remains uncertain and might not necessarily occur as soon as the central bank’s next decision on November 2.

Last month, the Bank of England chose to keep interest rates unchanged for the first time since embarking on its tightening cycle in December 2021, following an unexpected drop in inflation in August and other economic weaknesses.

Wednesday’s data reveals that core inflation, excluding volatile food, energy, alcohol, and tobacco prices, decreased slightly to 6.1% in September from the previous month’s 6.2%.

Meanwhile, services price inflation, another component closely monitored by the Bank of England, rose to 6.9% in September from 6.8%.

Manufacturers’ prices, considered an indicator of future inflation, dropped by 0.1% annually in September, following a 0.5% decline in August.

The headline CPI data came very close to rounding down to the 6.6% rate anticipated by economists polled by Reuters.

It’s worth noting that CPI had surged to an alarming 11.1% in October 2022 due to soaring European energy prices, caused by Russia’s invasion of Ukraine, and exacerbated by supply chain disruptions and labor shortages stemming from the COVID-19 pandemic.

In its last forecasts made in August, the Bank of England predicted that inflation would remain above its 2% target until early 2025.

The British government is also closely monitoring inflation, with Prime Minister Rishi Sunak pledging to cut it in half back in January.

For many households, the struggle to keep pace with rising prices has resulted in a declining standard of living, with food prices, in particular, posing a significant concern.

Finance Minister Jeremy Hunt, reacting to the data, stated, “As we have seen across other G7 countries, inflation rarely falls in a straight line, but if we stick to our plan, then we still expect it to keep falling this year.”