Inflation in the U.K. surged to a six-month high in October, surpassing the Bank of England's target rate. The Office for National Statistics reported that consumer price inflation rose to 2.3% in the year to October, up from the previous month's three-year low of 1.7%. This increase was primarily driven by higher domestic energy bills and persistent inflation in the services sector, which makes up a significant portion of the British economy.
The uptick in inflation is expected to solidify market expectations that there will be no further cuts in borrowing rates this year. The Bank of England recently raised its main interest rate to 4.75%, the second increase in three months, in response to the low inflation levels earlier this year.
Bank Governor Andrew Bailey cautioned that interest rates would not decrease rapidly in the coming months, citing the potential impact of recent budget measures introduced by the new Labour government. The government's additional spending of around 70 billion pounds, funded through increased business taxes and borrowing, could lead to higher inflation next year.
Global inflation dynamics have also become more uncertain following the reelection of U.S. President Donald Trump. His proposed tax cuts and tariffs on certain imports could have inflationary effects both in the U.S. and globally, potentially keeping interest rates higher than anticipated.
Economists anticipate that the Bank of England will continue to cut rates in 2025, albeit at a slower pace than previously expected. Inflationary pressures from the recent budget announcements, coupled with global uncertainties surrounding the Trump presidency, are likely to keep interest rates elevated for an extended period.
