Inflation has undershot forecasts to come in at 3.8% for the 12 months to September, opening the door ajar to more dovish Bank of England policy than had been anticipated.
The consensus expectation among economists was for an increase in CPI to 4%, with the uptick driven by food and drink prices. However, these came in softer than thought, while the core inflation reading was 3.5%.
In coming in flat on the past two months’ readings, the figures have provided the Bank of England with more scope for rate cuts.
The 3.8% reading is still well above the 2% target though, which means cuts will still only be slow and steady in the near term, if they come at all.
Rising wages have also been feeding into inflation since the government increased employer national insurance, and lifted public sector pay and benefits.
Despite that reality, markets were buoyed by the news, with the FTSE 100 up 0.7% to 9,492 on Wednesday, and the FTSE 250 rising 0.6% to 22,044.
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Neil Birrell, CIO at Premier Miton Investors, said: “At last there is some good news for the chancellor, and the rest of us, on the inflation front. With growth stagnant, national debt extreme and a tough budget coming up, the UK feels under the cosh.
“One good inflation number won’t push the Bank of England into a rate cut, which the economy could do with, but maybe there is some light at the end of a long dark tunnel.”
Nicholas Hyett, investment manager, Wealth Club, said: “A surprise inflationary undershoot will spark relief all round. True, prices are still rising at nearly twice the Bank of England’s target, but if things get no worse its unlikely the rate setters on Threadneedle Street will have to start hiking interest rates again and fingers crossed, that leaves enough oxygen for the economy to pick up some momentum.
“The roll-over in food inflation will be particularly welcome, and while services inflation is still high there’s hope that it will subside once we lap the higher minimum wage and national insurance contributions the government imposed on employers at the start of the year.
“It’s possible the UK is escaping the self-imposed inflationary exceptionalism created by higher taxes and a weakend trade position,” he continued. “We just hope the government doesn’t manage to repeat last year’s trick in November by carefully selecting tax increases that could have been designed to return the UK to inflationary purgatory.”
Lindsay James, investment strategist at Quilter, added: “Overall, this is an encouraging sign and could mark the peak.
“Wage inflation also remains an indirect driver of higher prices generally. It currently sits at nearly 5%, due to a mix of factors including public sector pay rises, a lack of labour mobility, skills gaps and demographic factors.
“However, despite some of these elements being structural, 2026 is unlikely to see pay rises of this magnitude. Public sector pay agreements have been largely reset, and a still-slow economy is likely to hold back the private sector, which is beginning to turn to AI to fill entry level roles in some areas.”
Confirmation that inflation has not outstripped wages means it will be the 4.8% rise in the latter that will be the part of the ‘triple lock’ used to increase the state pension this year.
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Claire Trott, head of advice at St. James’s Place said: “Today’s UK CPI figures confirm that, as expected, next April’s state pension rise will be determined by average earnings, meaning pensioners are set for a substantial uplift of over £550 annually.
“However, this rise is something of a double-edged sword. While the boost will be welcomed by many, it also pushes the new state pension to just below the personal allowance, and risks nudging many more people into paying tax on any other additional income they have.”
