UK inflation eases to 3.6% in October giving hope for interest rate cut after budget

UK annual inflation, as measured by the Consumer Prices Index, slowed to 3.6 percent in October, offering the first relief in five months and raising prospects of a potential interest rate cut following Chancellor Rachel Reeves’s upcoming tax and spending statement. The figure, released by the Office for National Statistics, signals a decline from the 3.8 percent seen during the previous quarter and aligns with City economists’ expectations. Gas and electricity prices rose at a slower pace than a year earlier, providing the most significant contribution to the easing inflation, accompanied by a reduction in hotel prices. However, food prices remain a concern, with annual food inflation rising from 4.5 percent in September to 4.9 percent in October, driven by increases in the prices of bread, cereals, meat, and vegetables.

While the moderation in headline inflation brings figures below projections from the Bank of England, the current rate is still well above the government’s 2 percent target. Chancellor Reeves has underscored the importance of supporting households and reducing the cost of living, stating that additional measures will feature in next week’s budget. These may include a potential cut to the 5 percent VAT rate on domestic energy bills, estimated to save households around £80 a year and cost approximately £2.5 billion to implement. Reeves has also asked the Competition and Markets Authority to examine the sharply rising prices of private dental treatment, amid broader concerns over affordability.

The Bank of England has reduced borrowing costs five times since Labour took office in July 2024, the most recent cut occurring in August. Financial markets now reflect an 85 percent chance of a quarter-point rate cut in December, driven by the downward shift in inflation and accompanied by a slight decline in the pound. Core inflation, which excludes food and energy and is closely monitored by the Bank, edged down to 3.4 percent in October.

Despite these positive trends, the UK continues to record the highest inflation rate among G7 economies; households remain under pressure from persistent price increases in essential categories. Shadow Chancellor Mel Stride pointed to the impact on working people, emphasising that inflation has consistently exceeded the target since Labour’s last budget. Economists have suggested that headline inflation could even rebound in November due to ongoing volatility.

Unemployment rates are rising and wage growth is slowing, factors which may strengthen the case for a rate reduction if the post-budget outlook allows. The latest figures position the Bank of England to consider a further cut if policies in the forthcoming budget do not lead to renewed inflationary pressures.

The Bank expects inflation to ease to approximately 2.5 percent in 2026 and approach the official 2 percent target by 2027, though much depends on both domestic policy directions and global economic developments. As households continue to grapple with elevated living costs, the focus will remain on whether fiscal and monetary authorities can chart a path toward economic stability in the months ahead.