- Interest rates are now higher than inflation for the first time since 2016
- Economists sceptical about how much credit the government really deserves
The headline rate of UK inflation fell sharply in October, coming in at 4.6 per cent, down from 6.7 per cent in September. It is the lowest inflation has been since October 2021, when the consumer price index was 4.2 per cent. Core inflation also decelerated, from 6.1 to 5.7 per cent, but remains high by international standards.
The bulk of the fall was driven by a one-off swing in utilities price inflation, which plummeted as the impact of last October’s increase in the Ofgem price cap rolled off calculations. According to the Office for National Statistics (ONS), easing food prices and housing and housing services also made a downward contribution to last month’s inflation rate.
Today’s figures represent a significant milestone for policymakers. For the first time since 2016, UK interest rates are higher than the rate of inflation. The government will also be relieved that it has met its target of halving by the end of the year, just in the nick of time.
What will the Bank of England do next?
Yet the picture is not entirely rosy. Economists expect inflation to fall slowly over the months ahead, meaning we cannot rely on another drop of today’s magnitude to bring inflation back to target. Analysts at Capital Economics expect core and headline inflation to stall over the next few months, before edging lower again in February.
The Bank of England also released more pessimistic forecasts in November, and now expects inflation to return to target by the end (not the beginning) of 2025. The Bank is concerned about the risk of energy price spikes arising from conflict in the Middle East, as well as the lingering impact of wage and price pressures.
ONS data released on Tuesday revealed that growth in regular pay was 7.7 per cent in the three months to September, only slightly down on the previous period. Including bonuses, annual pay growth was significantly higher than inflation, at 7.9 per cent.
Despite this, economists see little scope for further interest rate hikes. Following the announcement, Hugh Gimber, global market strategist at JP Morgan Asset Management said that “the case against any further rate hikes is increasingly clear, but significantly more evidence will be required before rate cuts can start to be considered”.
What does this mean for the Autumn Statement?
Though the government will be buoyed by meeting its inflation target, economists are sceptical about how much credit it really deserves. Following the release, Nicholas Hyett, investment analyst at Wealth Club said it was "dubious" for the government to celebrate a fall in global energy prices over which "it has no control”.
The government still faces a difficult economic backdrop ahead of the Autumn Statement. Inflation remains far higher in the UK than in either the US or the Eurozone, where headline rates have fallen to 3.2 per cent and 2.9 per cent, respectively. The government is battling a higher interest burden and pressures from spending on health and state pensions. Combine this with a lower growth outlook and potential tax take, and there seems to be very limited scope for giveaways next week.
