U.K. Chancellor Rachel Reeves’ Wednesday started with a much-needed fillip, in the form of data suggesting inflation peaked below 4 percent in September.
The Office for National Statistics said consumer prices were unchanged on the month while the headline rate stayed at 3.8 percent on the year, below the City’s forecast for 4 percent.
Importantly, the slowdown was the result of lower food prices, which have an outsize impact on lower-income families and on broader perceptions of inflation. Food inflation slowed to 4.5 percent from 5.1 in the year through August.
The figures will come as a relief to Reeves for a number of reasons: first, they will reduce the cost of servicing Britain’s debt, a quarter of which is directly tied to the inflation rate; second, they could take some of the pressure off the upcoming public sector pay round. Those two factors have both threatened to spoil the chancellor’s arithmetic as she prepares her budget at the end of next month.
The figures may also revive some expectations of an interest rate cut from the Bank of England by year-end. A string of disappointingly strong inflation reports over the spring and summer convinced most in the markets that the BoE wouldn’t be able to cut again until next year. At 3.8 percent in September, inflation is still nearly double the bank’s 2 percent target. However, with last year’s drop in regulated energy prices now falling out of the calculations, the BoE expects the headline rate to decline slowly from now on.
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