UK inflation cools to 3.6% in October, boosting chance of a Christmas rate cut
Regent Street in London celebrates the Christmas season on November 13, 2025 in London, England.
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The U.K.’s inflation rate cooled to 3.6% in October, marking one of the last major economic data releases ahead of the government’s Autumn Budget next week.
Economists polled by Reuters had expected a rate of 3.6% in the twelve months to October, down from 3.8% in September.
Core inflation, excluding energy, food, alcohol and tobacco, rose by 3.4% in the year to October, down from 3.5% in September, according to the latest figures from the Office for National Statistics.
“Inflation eased in October, driven mainly by gas and electricity prices, which increased less than this time last year following changes in the Ofgem energy price cap. The costs of hotels was also a downward driver, with prices falling this month,” Grant Fitzner, chief economist at the ONS, commented Wednesday.
These downward pressures were only partially offset by rising food prices, following the dip seen in September, while the annual cost of raw materials for business continued to increase.
Responding to the latest data, U.K. Chancellor of the Exchequer Rachel Reeves said “this fall in inflation is good news for households and businesses across the country, but I’m determined to do more to bring prices down.”
“That’s why at the budget next week I will take the fair choices to deliver on the public’s priorities to cut NHS waiting lists, cut national debt and cut the cost of living,” she said, in comments released by the Treasury.
Sterling was flat against both the U.S. dollar and the euro in the immediate aftermath of the release. Meanwhile, yields on U.K. government bonds — known as gilts — were marginally lower across the maturity curve.
The U.K. government has the highest long-term borrowing costs of any G-7 nation, with the yield on its 30-year gilt trading well above the critical 5% threshold.
Budget then Christmas cut
The Bank of England had previously forecast that inflation would peak at 4% — double the central bank’s target — in September, before gradually cooling into next year.
Economists expect the central bank will cut interest rates at its next meeting in December, as inflation cools and growth remains stubbornly low; the U.K. economy grew a meager 0.1% in the third quarter, preliminary figures released last week showed.
For now, however, all eyes are on the U.K. Treasury’s Autumn Budget, which will be announced on Nov. 26, with analysts looking to see the extent of expected tax rises, which could be disinflationary.
“Looking ahead, the Autumn Budget will likely mark the next most important inflation forecast update. Speculation around lower energy bills, indexation costs, duties, and food prices remain rife,” Sanjay Raja, chief U.K. economist at Deutsche Bank, said in analysis ahead of the inflation data.
“We expect the Chancellor to push through some modest measures to pull down on prices come 26 November. This will give us a good sense of where 2026 inflation will land,” he said.
Relief for Reeves
The latest inflation reading will provide “much-needed positive relief” for Reeves, according to Brad Holland, director of investment strategy at J.P. Morgan Personal Investing.
“While a slowing rate of price rises will be welcome news to many – not least of all UK consumers preparing for their festive spending – the U.K. economic picture remains mixed,” he said in emailed comments.
Holland said the latest inflation data would likely push the central bank toward a pre-Christmas cut when it meets on Dec. 18.
“With the latest data following lack lustre growth figures out last week, the calls that action is needed are getting louder by the day. Markets are pricing in an 80% chance of a 0.25% interest rate cut in December, and the data is suggesting the time has probably come,” he said.
Chancellor Rachel Reeves poses with the red box outside number 11 Downing Street on October 30, 2024 in London, England. This is the first Budget presented by the new Labour government and Chancellor of the Exchequer, Rachel Reeves.
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George Brown, senior economist at Schroders, said that while the latest data tipped the scales toward a December rate cut, any further rate cuts will largely depend on the contents of the Chancellor’s red box.
“If VAT and green levies are eliminated from household energy bills, inflation could fall by as much as half a percentage point,” he said in emailed comments.
“But we remain concerned that broader price pressures will prove persistent. Wage growth is still well above a target-consistent pace, especially given repeatedly weak productivity. The Bank [of England] must tread carefully given the heightened risk that high inflation becomes entrenched.”
