UK inflation for October bounced to 2.3%, up from September’s 1.7% and above the expectations of 2.2%.
While the inflation reading came in higher than anticipated, last week’s UK GDP figures were below expectations for the third quarter, with growth of 0.1% falling below analysts’ expectations of 0.2%.
Much of the inflation increase for October was due to an increase in energy prices, which Neil Birrell, chief investment officer at Premier Miton Investors, said was expected.
“UK inflation was slightly higher than expected in October, although not by enough to be concerning, as higher energy costs kicked in,” Birrell said.
“However, if we do see food prices rising as well, the rather stagnant economy could come under more pressure, so attention will focus on the Bank of England’s policy approach. It’s an uncertain period for the economy as we head rapidly towards the Christmas shopping season.”
On 7 November, the Bank of England opted to cut rates for the second time this year by 25 basis points to 4.75%. The cut prompted some concern from markets, with some expecting Rachel Reeves’s Autumn Budget to cause an increase in inflation.
Lindsay James, investment strategist at Quilter Investors, said: “The Bank of England opted to cut rates again at its latest monetary policy meeting, but with inflation, wage growth and unemployment all on the rise, while stalling GDP continues to highlight the malaise the UK finds itself in, the pace of future cuts is looking much less certain. Expectations for further cuts have been scaled back considerably, with rates expected to remain above 4% throughout 2025.
“This is a clear reminder that short term inflationary pulses may return, potentially caused by factors such as obstacles to trade, labour market tightness, taxation and volatility in food and energy prices. Whether October’s uptick in inflation proves to be just a blip remains to be seen, however it seems more likely that the Bank may err on the side of caution in coming months as a growing list of inflationary risks emerge on the horizon.”
The Bank of England will hold its final monetary policy committee meeting on 19 December, and resume in 2025 on 6 February.
Patrick O’Donnell, senior investment strategist at Omnis Investments, believes the economic situation in the UK has created an attractive environment for investing in bonds.
“Coming in at 2.3% y/y, it is 0.1pp lower than the MPC had forecast at the August Monetary Policy Report. However, things have moved on a bit since then, with Rachel Reeves’ budget and a Red Sweep in the US, leading to a significant repricing of UK Gilt yields higher,” O’Donnell said.
“While there will be upward pressure on UK inflation from an aggressive tariff policy, there will also be a negative growth impulse, so with only two 25bps cuts priced by the middle of next year and another one by the end of 2025, we feel that bond yields look attractive into 2025.”
