Bank of England
The recent decision by the MPC to refrain from a rate hike in September marked a shift from the trend observed since November 2021. Google

In September, UK inflation stubbornly defied expectations of a slowdown, primarily due to rising oil prices counteracting downward pressures from food costs.

The Consumer Prices Index (CPI) climbed by 6.7 per cent year-on-year, matching the previous month's rate, according to the Office for National Statistics (ONS).

Economists had anticipated a slight dip to 6.6 per cent. Despite this, the modest deviation is unlikely to alter the interest rate outlook, as the Bank of England (BOE) has already implemented 14 consecutive rate hikes to address economic concerns. The BOE is scheduled to convene on November 2 to evaluate whether additional measures are necessary to bring inflation back to the 2 per cent target.

Commenting on the situation, Dan Hanson and Ana Andrade of Bloomberg Economics noted: "The Bank of England is unlikely to panic at the news that the rate of inflation failed to ease in September. The bigger picture is that annual price growth is still running below its August forecast and is set for a big drop next month. Add in signs that the central bank appears to have more tolerance for upside data surprises and we think it will still be minded to keep rates on hold at its November meeting."

In the previous MPC meeting in September, officials decided against a rate hike, marking the first time since November 2021, preferring a wait-and-see approach to assess the evolving economic landscape. Chieu Cao, CEO of Mintago, a financial well-being adviser firm, expressed concern about the inflation data, emphasising that while the overall price increases might not have technically risen, certain essential expenses continued to rise.

Market expectations for further rate hikes remained relatively stable, with a 30 per cent chance of a quarter-point increase next month and a greater than 60 per cent probability of such a move by early next year. Additionally, markets were pricing in 40 basis points of policy easing in the following year, with the first cut expected in November.

Paul Dales, Chief UK Economist at Capital Economics, considered the failure of CPI to fall in September "disappointing". However, he emphasised that since it remains below the 6.9 per cent rate projected by the BOE in August, another interest rate increase is unlikely.

The unexpected inflation reading followed recent labour market data from the ONS, indicating a slight cooling in employment. Although average earnings growth slowed from the previous month, it remained near historical highs, while the number of workers on company payrolls declined. Yael Selfin, Chief Economist at KPMG UK, believed that inflationary momentum is poised to weaken in the coming months, along with a loosening labour market, providing a rationale for the BOE to maintain interest rates.

Core inflation, which excludes volatile food and energy prices, experienced a milder-than-expected drop to 6.1 per cent from 6.2 per cent. Notably, services inflation, closely monitored by the BOE, unexpectedly accelerated to 6.9 per cent from 6.8 per cent. The Trades Union Congress (TUC) highlighted that the UK still retained the highest inflation rate among Group of Seven countries.

The primary drivers of inflation stability were higher fuel prices for motorists, while the prices of food, non-alcoholic drinks and household goods exerted a moderating effect. Motor fuel prices surged by 3.6 per cent between August and September, contrasting with a four per cent decrease a year earlier. Additionally, the annual inflation rate for restaurants and hotels increased from 8.3 per cent to 8.6 per cent, indicating domestically driven inflation, which concerns BOE policymakers.

Economists anticipate a further decline in the inflation rate in October due to a decrease in household energy bills under the price cap, aligning with Prime Minister Rishi Sunak's goal of halving inflation this year. Chancellor of the Exchequer Jeremy Hunt emphasised the importance of adhering to the plan to alleviate the financial burden on families and businesses.

The figures also suggest that welfare recipients can anticipate a substantial increase in payments next April, as the annual uprating is based on the previous September's CPI inflation.

The Bank of England's Monetary Policy Committee is divided on the appropriate policy stance. While some members advocate an "aggressive" approach to prevent domestic inflationary pressures from taking root, others fear the adverse consequences of "overtightening" the UK's supply potential. The central bank's Chief Economist, Huw Pill, warned against complacency in addressing inflation but noted that wage data appeared to be an outlier when compared to other economic indicators.

Subsequently, attention is focused on upcoming labour market data from the ONS, scheduled for release on Tuesday, covering employment, unemployment and the inactivity rate. Meanwhile, producer input and output prices both rose by 0.4 per cent month-on-month, largely reflecting the increased cost of crude oil. However, these figures remain lower than the same period a year earlier, suggesting that pipeline pressures are beginning to ease.

Helen Dickinson, CEO of the British Retail Consortium, expressed hope that cost pressures would continue to alleviate as the crucial Christmas period approached. Nevertheless, the September CPI figures indicated an impending £470 million annual increase in business rates for retailers starting next year, potentially putting renewed pressure on consumer prices.