UK headline Consumer Price Index (CPI) rose 3.6% year-over-year (YoY) in October, cooling from September’s 3.8% reading, according to data released Wednesday by the Office for National Statistics (ONS). The figure aligned with market forecasts of 3.6%, marking the first slowdown in inflation in five months. Despite the moderation, price growth remains well above the Bank of England’s (BoE) 2% target.
Core inflation and services prices moderate
Core CPI — which excludes volatile food and energy categories — grew 3.4% YoY in October, down slightly from September’s 3.5% and in line with expectations. Services inflation also eased, falling to 4.5% from 4.7% the previous month.
On a monthly basis, CPI rose 0.4% in October, reversing September’s flat reading.
GBP slips after CPI release
The Pound Sterling (GBP) dipped modestly following the data, with GBP/USD trading 0.04% lower at 1.3145 at publication time.
What drove the expected inflation slowdown?
Economists had anticipated a softer inflation print, driven mainly by easing food and energy costs. Prices of key food categories — including chocolate, coffee, cheese, and eggs — have stabilised after sharp increases earlier this year. Energy bills also grew at a slower pace, with Ofgem reporting a 2% annual rise in October versus nearly 10% a year earlier.
Core inflation, closely watched by the BoE, was also expected to cool further from July’s 3.8% peak, providing additional evidence that underlying price pressures are easing.
Broader economic backdrop weakens the case for higher rates
Recent UK macroeconomic data has painted a downbeat picture. GDP contracted 0.1% in September and slowed to 0.1% growth in Q3, below the expected 0.2%. Industrial Production and Manufacturing Production both declined sharply in September, while the latest labour market report showed unemployment rising to 5% for the first time since 2021. Wage growth also softened to 4.8%.
The BoE kept rates unchanged at 4.0% in its November meeting, with four MPC members already voting for a cut. If inflation continues to cool, markets see the December 18 meeting as a potential turning point for the central bank to adopt a more dovish stance.
Outlook for GBP/USD
A softer inflation reading increases pressure on the Pound, particularly as expectations for a December US Federal Reserve (Fed) rate cut have diminished. FXStreet analyst Guillermo Alcala notes that the pair could fall below 1.3085 and potentially revisit the key 1.3000 support level if markets interpret the data as opening the door for BoE rate cuts.
However, a hotter-than-expected inflation outcome — while unlikely — would complicate the BoE’s policy outlook and could lead to choppy GBP/USD price action ahead of Thursday’s US Nonfarm Payrolls release.
