UK inflation holds at 3.8% in September, fuelling hopes of earlier rate cut

UK inflation held steady at 3.8 per cent in September, defying expectations for a rise and raising the possibility that the Bank of England will cut interest rates before the end of the year.

The latest Office for National Statistics (ONS) data showed consumer price inflation (CPI) was unchanged from August, and below the 4 per cent forecast by Bank and City economists. The figures suggest that the deflationary trend may be regaining momentum, providing some relief to households and policy makers.

The headline figure was driven by lower food inflation, which fell from 5.1 per cent to 4.5 per cent – the first decline in six months – along with slower increases in leisure and service costs.

Core inflation, which excludes energy and food, fell from 3.6 percent to 3.5 percent, below expectations for an increase, while services inflation – a key indicator of labor costs – held steady at 4.7 percent, below the bank’s forecast of 5 percent.

The only significant upward pressure came from higher fuel and airfares, which was partially offset by cost relief in the hospitality and retail sectors.

Economists said a weaker-than-expected inflation reading could prompt the Monetary Policy Committee to act sooner than markets expect.

“A move in November seems unlikely, but policymakers may be overestimating how long they can wait,” said Martin Beck, chief economist at WPI Strategy. “Fiscal tightening in the budget, combined with rising unemployment and slowing wage growth, point to a slowdown in the economy. A forward-looking central bank should recognize that deflationary forces are building.”

George Buckley, chief European economist at Nomura Bank, added that the data keeps “the next MPC meeting live,” anticipating a 25 basis point cut in November.

Markets now expect a rate cut in December, with further cuts expected in early 2026 as inflation continues to approach the bank’s 2 per cent target.

The inflation figures come as Chancellor Rachel Reeves prepares her first full Budget on November 26, with the government signaling measures to support families and reduce living costs.

Reeves said she was “not satisfied” with current inflation levels but reiterated that reducing price pressures remained her top priority.

She said: “All of us in the government are responsible for supporting the bank in reducing inflation.” “We will continue to help those struggling with their bills as we build an economy that rewards working people.”

Sources close to the Treasury indicate that the budget could include cutting VAT on energy bills, extending the freeze on fuel duties, and taking measures to ease salary costs after last year’s National Insurance increase.

Analysts at Capital Economics estimate that a 5 percent VAT cut on utilities would cut annual CPI growth by 0.2 percentage points, while broader fiscal constraints could push inflation closer to 2.8 percent in 2026.

Despite better-than-expected data, the UK is still on track to record the highest average inflation rate among major advanced economies this year, according to the International Monetary Fund and the Organization for Economic Co-operation and Development.

Ongoing price pressures associated with benchmarked utilities, transportation costs and global food markets continue to impact household finances.

However, economists now see signs of a continuing slowdown. “The disinflation process is clearly underway,” said Rob Wood, chief economist at Pantheon Macroeconomics. “Coupled with slower growth and a tight fiscal stance, inflation could fall below 3 percent next year – justifying interest rate cuts sooner rather than later.”

For households, lower inflation also confirms that state pensions will rise by 4.8 per cent next April under the triple lock, in line with the jump in average weekly earnings.

As policymakers consider tightening fiscal policy against a fragile recovery, September’s figures could mark the turning point that allows the Bank of England – and the Chancellor of the Exchequer – to finally ease the brakes.