Surging housing costs push inflation back above Bank of England target
According to the latest figures from the Office for National Statistics (ONS) consumer price inflation (CPI) hit 2.3 per cent in October.
The figure came in above economists projections. Economists had forecast CPI to come in at 2.2 per cent, up from 1.7 per cent in September.
Higher energy bills pushed the headline figure higher, with regulator Ofgem hiking its price cap on household bills by 9.5 per cent last month.
Housing costs also pushed the headline figure higher. Rental prices and owner-occupied housing costs both increased by 7.4 per cent – over triple the headline rate of CPI.
The latest inflation figures throw a bit of uncertainty over the trajectory of future interest rates.
The Bank of England’s governor Andrew Bailey has warned that services inflation “is easing only gradually” and that a “more substantial fall” is unlikely this year.
Bank of England: Judging the impact of the Budget
Bailey has also suggested policymakers are still waiting to judge the impact measures in Chancellor Rachel Reeves’ first Budget will have on the UK economy.
The central bank raised its inflation forecasts for the next three years after Reeves increased taxes on employers, which business groups have warned could lead to higher prices and a hiring slowdown.
“I saw the BRC’s (British Retail Consortium’s) letter and I think they’re right to say, I think there is a risk here that the reduction in employment could be more,” Bailey said. “Yes, I think that’s a risk.”
He added that “there will be more pressure on firms’ margins” but they would “probably rebuild those profit margins over time.”
Uncertain outlook for interest rates
Commenting on the data, Paresh Raja, CEO of Market Financial Solutions, said: “After years of sky-high inflation, any uptick in the CPI figure is understandably met with a healthy dose of trepidation. But the economy has turned a corner, and inflation will now regularly rise and fall – so long as it hovers close to the two per cent target, smaller shifts are perfectly fine.
“Much of the noise surrounding the monthly inflation data comes down to the impact on interest rates and the cost of borrowing. The Bank of England has signalled its intent to steadily cut rates, and even the fallout from the recent Budget did not derail those plans.
“There could be one final base rate cut for the year when the Bank next meets in December, and today’s modest CPI uptick ought not to dramatically alter the decision-making progress. Indeed, the expectation remains that the base rate will continue to fall over the coming year.”
Lindsay James, investment strategist at Quilter Investors said: “Last month’s surprise fall in inflation, which left it below the Bank of England’s two per cent target for the first time in over three years, has proven very short lived.
“Energy prices take some of the blame, after the Ofgem price cap on household bills lifted by nearly 10% last month, but other areas including the services sector have also contributed to the uptick, and the retail sector has also warned of potential inflationary pressures in the near future.
“With just one more MPC meeting before year end, it is looking increasingly likely that the Bank will close out 2024 with a hold on rates. This is a clear reminder that short term inflationary pulses may return, potentially caused by factors such as obstacles to trade, labour market tightness, taxation and volatility in food and energy prices.”
The Chief Secretary to the Treasury, Darren Jones, said: “We know that families across Britain are still struggling with the cost of living. That is why the Budget last month focused on fixing the foundation of our economy so we can deliver change. That includes boosting the National Minimum Wage, freezing fuel duty and protecting working people’s payslips from higher taxes.
“But we know there is more to do. That is why the Government is focused on economic growth and investment so we can make every part of the country better off.”