A UK CPI beat seals November, but we still see a December pause
UK inflation came in hot across the board this morning.
Headline CPI rose to 3.5% YoY in September, up from 3.1% in August and above the 3.4% consensus, delivering the highest reading since October 2025. Core inflation rose from 2.6% to 2.8%, while services inflation climbed from 3.4% to 3.7%, also a tenth above expectations. This rise in price growth, accompanied by yesterday’s stronger-than-expected labour market data, should seal a November rate rise from the BoE. That said, with energy still doing much of the heavy lifting, we see a high bar to a follow-up December move.
Unsurprisingly, motor fuels were again the largest upward contributor, running at 29.8% YoY, the highest since August 2022, while goods inflation hit 3.2%.
Even the services beat owes much to transport, with airfares falling by less in September than a year ago. By contrast, hotels provided a significant offset, food inflation held at 1.3%, and the reversal of the summer VAT cut on attractions barely registered. That is not the profile of an economy where second-round effects are running away, and it chimes with Governor Bailey’s assessment last week that these remain subdued so far.
Even so, with conflict in the Middle East ongoing, and the winter heating season now underway, upside pressure on energy prices is likely to persist in coming months.
A near-4% rise in the Ofgem cap from October will only show up in the next release on November 18th, and the Bank already expected inflation to reach around 3.75% this quarter and slightly above 4% in early 2027. Today’s data suggest the risks to that profile sit to the upside, warranting some pre-emptive tightening from the BoE.
For the MPC then, that settles the November question, if it was not settled already. A 25bp hike to 4.00% on November 5th, which would see the Bank finally follow the Fed and ECB, was close to fully priced coming into today.
Beyond that, swaps price in three to four hikes over the following 12 months. That path, we think, is too aggressive, absent clear evidence of second-round effects. As such, we expect the Bank to hike in November and then hold on December 17th, waiting to see how the Budget, the October energy cap rise and its new forecasts play out before committing further, and we continue to share Chief Economist Pill’s scepticism of the extended cycle priced. Governor Bailey’s fireside chat at 14:00 BST is the next test of that view.
For sterling, it means we are inclined to fade any strength from here. The immediate market reaction has proven muted, underscoring the lack of scope for accelerated tightening expectations after yesterday’s labour market data.
That leaves sterling risks tilted firmly to the downside into next week’s Autumn Budget. We therefore retain our bearish sterling bias into month-end, though with upside risk to our own month-end cable forecast of 1.30.