UK inflation September 2024

LONDON — U.K. inflation fell sharply to 1.7% in September, the Office for National Statistics said Wednesday, raising market expectations of a Bank of England rate cut in November.

Economists polled by Reuters had expected the headline rate to rise 1.9% for the month, the first fall below the Bank of England's 2% target since April 2021.

Inflation has been hovering around this level for the past four months, reaching 2.2% in August.

Core inflation, which excludes energy, food, alcohol and tobacco, was 3.2% during the month, down from 3.6% in August and below the Reuters poll forecast of 3.4%.

Price rises in the services sector, the dominant part of the UK economy, fell significantly to 4.9% last month from 5.6% in August, now reaching their lowest rate since May 2022.

Core inflation and services inflation are key monitoring points for Bank of England policymakers as they consider whether to cut interest rates again at their November meeting.

Money market prices for a 25 basis point cut in interest rates in November jumped from 80% to 92% after the latest inflation reading, with the next cut in December almost fully priced in. The decline in wage growth announced by the Office for National Statistics this week has supported the case for interest rate cuts.

Fall in British pound After Wednesday's publication reflects a more cautious outlook for the Bank of England, the pound fell 0.6% against the US dollar at $1.299, falling below the $1.3 level for the first time since September 11. The British currency fell by 0.5% against the euro.

Meanwhile, yields on British government bonds, known as government bonds, fell across the board. Gilt returns for two years Decreased by 9 basis points 10-year gilt yield Decreased 7 basis points.

Headline inflation in the UK fell from its peak of 11.1% in October 2022 to 1.7% in September.

“These figures provide reassurance that the UK has moved to a more moderate inflation environment, supported by lower fuel prices,” Soren Thero, director of economic affairs at the Institute of Chartered Accountants in England and Wales, said in a note. In services inflation he notes that “underlying price pressures have become less sticky.”

However, Theroux added that British inflation may reverse its decline in October due to the increase in energy price caps set by regulators, while the Bank of England will wait to assess the UK Labor government's long-awaited first budget at the end of the month for any prospects. The inflationary effect before the cycle closes.

Capital Economics' chief UK economist, Paul Dales, was similarly cautious, noting that much of the unexpected weakness in core and services inflation was due to a significant decline in airfares. Dales said it was slightly more likely that the Bank of England would commit to 25 basis point cuts at every other meeting as a result, even if the chance of two further cuts this year had now increased.

“We still believe that interest rates will eventually fall to 3.00%, which is lower than the 3.50-3.75% in the market,” he said.

However, Sanjay Raja, chief economist at Deutsche Bank in the UK, said the inflation numbers would be “music to the global economy”. [Monetary Policy Committee’s] “It could lead them to consider a faster unwinding of restrictive policy, including successive interest rate cuts.

Raja also noted the risks posed by the budget, which he said was “likely to be expansionary despite the scale of fiscal consolidation scheduled on October 30.”