UK inflation slows sharply to 4.6%

UK inflation slows sharply to 4.6%

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UK inflation slowed more sharply than expected to 4.6 per cent in October thanks to a retreat in energy prices, allowing Prime Minister Rishi Sunak to declare he has met his pledge to halve the rate of price rises by year end.

The year-on-year rise in the consumer prices index was lower than the 4.8 per cent predicted by economists, and below the 6.7 per cent pace recorded for September.

The Office for National Statistics figures mean inflation is at its lowest pace since 2021.

Sterling fell 0.2 per cent against the dollar to $1.2470 after the ONS release as the data added to financial markets’ conviction that the Bank of England has finished raising interest rates.

The yield on interest rate sensitive two-year gilts fell 0.03 percentage points to 4.54 per cent, the lowest level since June.

Wednesday’s figures will come as a relief to Sunak, who said in January that he wanted to see inflation halve from 10.7 per cent by the end of 2023. While the slowdown in inflation was widely predicted, including by the BoE, it will provide a more positive backdrop as the government delivers its Autumn Statement next week.

Welcoming the data, Sunak said meeting his goal had required “hard decisions and fiscal discipline”.

“But while it is welcome news that prices are no longer rising as quickly, we know many people are continuing to struggle, which is why we must stay the course to continue to get inflation all the way back down to 2 per cent,” he added.

The sharp fall in headline inflation was driven in part by a reduction in energy regulator Ofgem’s price cap, reflecting lower wholesale gas prices. Slowing food price inflation also helped drag the headline number lower.

The core CPI rate, which excludes energy and food, rose 5.7 per cent in the 12 months to October, down from 6.1 per cent in September. The rate of services inflation, which is closely watched by the BoE as a gauge of domestic pricing pressures, slowed more than expected from 6.9 per cent to 6.6 per cent.

The more benign inflation readings will fuel discussion of when the first interest rate reductions are likely to come. In the UK, the BoE wants to see conclusive evidence that price growth and the labour market have cooled before it contemplates easing borrowing costs.

Hugh Gimber, global market strategist at JPMorgan Asset Management, said that although the ONS data suggested interest rates had reached sufficiently high levels to slow the economy, “significantly more evidence will be required before rate cuts can start to be considered”.

The swaps market, which reflects predictions of the future level of BoE rates, moved to fully price in the first interest rate cut in June next year and three 0.25 percentage point reductions in 2024.

The slowdown in the UK inflation rate mirrors easing price growth in other big economies and adds to evidence that central banks’ tightening cycle is over.

Line chart of Year-on-year % growth in CPI inflation in select countries showing UK inflation is falling towards rates of peers

Consumer price growth in the US fell to 3.2 per cent in October compared with 3.7 per cent the previous month, according to figures released on Tuesday, while in the eurozone inflation fell to 2.9 per cent in October from 4.3 per cent in September.

Despite the slowdown in inflation, prices are rising at more than twice the pace of the BoE’s 2 per cent target. The overall price level in the UK was still more than 16 per cent higher last month than in October 2021, according to the ONS.

Shadow chancellor Rachel Reeves said the fall in inflation would “come as some relief for families struggling with the cost of living” but added that successive Conservative administrations had left “working people . . . worse off with higher mortgage bills” and “prices still rising in the shops”.

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