UK inflation increased to an annual rate of 2.3% in October, primarily driven by rising regulated domestic energy tariffs. This marks a significant rise from September's 1.7%, which was the first instance of inflation falling below the Bank of England's (BoE) target since 2021.
The surge in consumer prices has prompted a shift in market expectations regarding interest rate cuts, with sterling initially strengthening against the U.S. dollar before retreating. Following the data release, interest rate futures indicated a slower pace of anticipated cuts, while bond prices declined.
Both the BoE's latest forecast and a Reuters poll had anticipated a CPI reading of 2.2%. The increase in inflation represents the highest rate in six months and the largest month-to-month rise since October 2022.
Services inflation rose to 5.0% in October, up from 4.9% in September, aligning with market expectations. Core inflation, excluding volatile items like energy and food, rose to 3.3%, contrary to expectations for a decrease.
The BoE projects inflation will further increase to 2.4% and 2.5% in November and December, respectively. Some economists predict inflation could approach 3% by early 2025, influenced by the new government's budgetary policies and global economic uncertainties.
In response to the inflation data, investors adjusted their expectations for BoE rate cuts, now pricing in about 60 basis points of reductions by the end of 2025. Two-year British government bond yields rose by approximately 4 basis points as the market reacted to the news.
Despite some signs of easing inflationary pressures, such as a 0.8% drop in factory gate prices, the overall outlook remains challenging for policymakers and consumers alike.