The United Kingdom experienced a sharper-than-expected rise in inflation in October, with rates climbing above the Bank of England's (BoE) 2% target. This increase could slow the pace of future interest rate cuts, posing challenges for economic policymakers.

Consumer Prices Accelerate in October

Annual consumer price inflation (CPI) jumped to 2.3% in October, up from 1.7% in September, exceeding the market forecast of 2.2%. The month-on-month CPI also saw a significant increase, rising 0.6%, a sharp contrast to the flat growth recorded the previous month.

Core Inflation Remains High

Core CPI, which strips out the volatile categories of energy and food, rose 0.4% month-on-month, pushing the annual core inflation rate to 3.3%, up from 3.2% in September. Analysts had predicted the annual core rate would drop to 3.1%, making October's reading an unexpected surprise.

Inflation Remains Well Above Target

Despite being far below the 11% peak reached during the aftermath of the Ukraine conflict, the latest figures underscore a troubling upward trend. Surpassing the BoE’s 2% medium-term target, the inflation uptick could complicate the central bank's efforts to stabilize the economy amidst heightened public spending pressures.

Fiscal and Market Implications

The October 30 budget announcement, which included significant increases in public spending and higher employer taxes, prompted the BoE to revise its inflation forecasts for the next three years. These fiscal changes are likely to drive up costs for businesses, potentially fueling further inflationary pressures.

Before the budget, markets anticipated approximately four rate cuts by the Bank of England by the end of 2025. However, these expectations have narrowed to two or three cuts, influenced by the budget and global political developments, including Donald Trump's election as the next U.S. president.

December Monetary Policy Meeting in Focus

The Bank of England’s Monetary Policy Committee (MPC) is set to meet in December to decide the base interest rate. Given October’s unexpected inflation surge, the likelihood of a near-term rate cut has diminished. Policymakers may adopt a more cautious approach to ensure inflation remains under control.

(Sources: investing.com, reuters.com)