The UK’s rate of inflation fell to 3.6% in October, in line with the Monetary Policy Committee’s (MPC) forecast and down from 3.8% in September. Today’s data should provide the Bank of England with even more confidence to cut interest rates in December. Admittedly, inflation will stay around this level until January when it’ll likely fall closer to 3% before another material drop in April. However, the timing, and number, of future rate cuts will largely be determined by what happens in the Autumn Budget next week.

Lower energy price rises drag down UK inflation

The big driver of October’s fall in inflation to 3.6% came from a sharp slowdown in household energy inflation. It fell to 2.2% from 9.4% as last year’s 10% hike in Ofgem’s energy price cap fell out of the annual comparison. Household electricity and gas prices also rose by a much smaller amount this October than last. Slowing household energy inflation knocked 24bps off the headline inflation rate.

However, transport fuel inflation turned positive, rising to 1.4% from -1.2%. This added 7bps to inflation because fuel prices rose in October, but were falling this time last year. Fortunately, lower oil prices and more favourable base effects should bring fuel inflation back down over the coming months.

Airfare inflation also slowed sharply to 0.9% from 5.5%, knocking 3bps of the headline measure, as last October’s big rise wasn’t repeated.

These positive effects were offset by a rebound in food and non-alcoholic drink inflation, which rose to 4.9% from 4.5%. Higher food inflation will continue to worry the MPC because the evidence suggests this element has an outsized role in influencing the perception of inflation due to its visibility in household budgets. However, the MPC had pencilled in a 5% read in October for this category, so the rebound won’t be a surprise to the Committee.

Inflation to remain above-target, but unlikely to stop a December rate cut

October’s inflation data confirms that inflation is past its peak, which bolsters the case for a December rate cut. That said, inflation will stay above 3.5% until January, when it’ll fall towards 3%. Another big drop in inflation should come in April when more of last year’s smorgasbord of inflationary tax and regulated price hikes are no longer included in the annual comparison.

However, the big question is whether the Autumn Budget will contain enough deflationary taxes to weigh materially on inflation and therefore convince the MPC to cut interest rates further. Direct measures to reduce inflation, like cutting VAT on energy bills, may help at the margin. But, the MPC will probably look through any temporary reductions in inflation like this, meaning the decision will come down to the timing and degree of tax rises announced next Wednesday.

The risk here is that recent government messaging to seemingly rule out an income-tax rise suggests the Autumn Budget will be less deflationary and more backloaded than we previously thought. This would reduce the chances of further rate cuts in 2026.

Yet, the latest labour market datasets challenged the view that the jobs market was starting to stabilise after last April’s big increase in employment costs. We’re waiting for more data before making a strong call on 2026’s interest-rate cut path because the labour market data remains unreliable and revision prone.

In any case, both the labour market and inflation data are likely enough on their own to convince the majority of the MPC to push ahead with a December rate cut, regardless of what the Chancellor announces on 26 November.

All told, October’s drop in headline inflation has left financial markets even more convinced that a December rate cut is now nailed on. We agree. That said, the timing of future rate cuts is much more uncertain and will depend at least on what measures the Autumn Budget holds. For now, we continue to expect a terminal rate of 3.5% next year.

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