CPI inflation: rebound continues, but won't stop rate cuts yet

The big jump in inflation in October was entirely driven by the near 10% increase in regulated energy prices at the start of last month. Dig beneath the headline, though, and there are signs that domestically generated inflation is slowly easing. That said, headline inflation is still set to rise to around 3% by early next year.

Key drivers behind inflation

CPI inflation rose to 2.3% in October, from 1.7% previously. The main source of upward pressure came from energy costs. Household electricity bills increased by 9% on the month, having fallen by 7% at the same point in 2023.

Services inflation, a key metric for the Bank of England as it is more closely related to inflationary pressures in the domestic economy than the headline measures, rose slightly to 5%, from 4.9%, in line with what the Monetary Policy Committee (MPC) had expected.

Airfares and accommodation were also a key source of upward pressure in the category, each adding 0.1 percentage point to the headline measure.

However, “core” services inflation, which excludes volatile items like airfares, package holidays and education and is one of the MPC’s preferred measures, slowed last month from 5.3% to 5.1%.

UK inflation outlook

Inflation will almost certainly continue to rise this year and in early 2025 as favourable base effects fall out of the annual comparison, energy prices continue to rise and some of the measured contained in the Autumn Budget start to be felt. We expect inflation to rise to around 3% in early 2025 before gradually falling over the rest of the year, it’s likely to average around 2.5%.

What’s more, the risks are tilted towards higher inflation. The measures in the Budget, geopolitical tensions, tariffs and a stronger dollar could all push inflation higher over the medium term.

The policy takeaway

The jump in inflation in October, and probably another one in November, mean a December rate cut is pretty much off the table.

The rise in headline inflation over the next six months won’t prevent the Bank of England from cutting interest rates, but it will mean that cuts are gradual and cautious.

Our base case is the central bank will continue to move in quarterly steps and ease policy by 100 basis points by end 2025, taking rates to 3.75%.

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