UK Inflation Holds at 3.8% in September, Sterling Softens as Near-Term Rate-Cut Bets Reprice
London, Oct. 22 — UK consumer prices rose 3.8% year on year in September, unchanged for a third consecutive month and below the market consensus of 4.0%, according to the Office for National Statistics (ONS). The print reinforces the picture of a slow, uneven disinflation and cooled near-term expectations for aggressive Bank of England (BoE) easing.
Components and Drivers
- Services inflation held at 4.7%, undershooting economists’ forecasts of 4.9%. The stickiness highlights lingering underlying price pressures even as momentum eases.
- The ONS noted that the “flat” headline outcome largely reflected further disinflation in food prices, while transport (fuel and airfares) delivered the biggest positive contribution to the annual rate at the margin.
Market Reaction
The softer-than-expected CPI prompted modest sterling weakness against the US dollar as traders pared back wagers on imminent BoE rate cuts and shifted focus to the upcoming run of wage and services-inflation data.
Policy Context
At its September meeting, the BoE left Bank Rate unchanged by a 7–2 vote (two members backed a 25 bp cut). While the headline CPI surprise was constructive, inflation remains well above the 2% target, implying a “lower for longer” disinflation path and limiting room for rapid policy reversal.
Outlook
International organizations and private forecasters caution that the UK could remain among the higher-inflation G7 economies into 2025, keeping the BoE’s reaction function sensitive to services prices and pay growth. If food and energy remain benign and wage growth cools further, headline inflation should grind lower; the speed of services-inflation moderation is the key variable to watch.
Investor Takeaways
- FX: Softer CPI is near-term negative for GBP; trajectory will hinge on wage/PMI/services-CPI prints into Nov–Dec.
- Rates: A milder inflation path marginally supports front-end duration, but the BoE’s cautious stance argues against aggressive cuts being priced too quickly.
- Equities: Domestic, rate-sensitive sectors may benefit from a slower inflation backdrop, though durability relies on real-income gains and demand recovery.