Inflation in the UK has surged to 2.3% in October, marking its highest level in six months and surpassing the Bank of England’s 2% target.
This unexpected rise, up from 1.7% in September, was primarily driven by an increase in household energy bills.
Energy Costs Drive Inflation
The Office for National Statistics (ONS) reported that the Consumer Prices Index (CPI) inflation rose sharply due to a 10% increase in Ofgem’s utility price cap, which took effect on October 1st. This resulted in average household energy bills increasing by approximately £149 per year.
Grant Fitzner, chief economist at the ONS, explained: “Inflation rose this month as the increase in the energy price cap meant higher costs for gas and electricity compared with a fall at the same time last year.”
Impact on Interest Rates
The unexpected inflation jump has reduced expectations of rapid interest rate cuts from the Bank of England. Market analysts now predict just two more quarter-point decreases in 2025, with a 40% chance of a third. Andrew Bailey, Governor of the Bank of England, had previously cautioned against rapid rate cuts, partly due to potential inflationary pressures from recent budget measures.
Business and Consumer Impact
The rise in inflation and energy costs is likely to affect both businesses and consumers across the UK.
Kate Nicholls, Chief Executive of UKHospitality, said: “This higher-than-expected level of inflation is an ominous warning of what could come in April, when businesses across the country will be hit by significant cost increases.
“Hospitality is braced for its own £3.4 billion cost increase, and that will impact jobs and push up prices, which we know will be a struggle for customers.
“The reality is that businesses are unable to absorb any more cost, having taken on so much over the past four years, and it is consumers and team members that will feel the effects.
“If the Government wants to keep a lid on inflation, protect jobs and help businesses, it must urgently rethink its changes to employer NICs.”
Joe Nellis, economic adviser at Scottish accountancy firm MHA, also commented on the figures:
“While the jump in headline inflation from 1.7% to 2.3% marks the biggest rise since October 2022, the Bank of England will also put this into context that rates are not nearly comparable to those in excess of 10% recorded two years ago.
In the short-term, this spike has been caused by the rise in October of the energy price cap by 9.5%, increasing the money that each household is spending on their energy bills, but also influenced by the long-term domestic pressures of a tight labour market and rising employment costs.
These existing issues will be exacerbated by the effects of the Government’s recent Budget. The scale of the rises in public sector expenditure, increases in the minimum wage, and the likelihood that national insurance charges will lead to higher costs of employment, will all put upward pressure on prices.
Adding to these challenges, the strengthening of the US Dollar and the potential of tariffs imposed by President-elect Donald Trump will make US imports to the UK more expensive.
Given this unfavourable economic outlook, the BoE will be quietly content if inflation remains below 3% over the coming months.
Another cut in interest rates this side of Christmas is now extremely unlikely, and rate cuts will be slower to materialise than expected in the New Year. However, in the longer term the relatively small uplift in inflation expected over the next few months is manageable and will not be enough to lead the BoE to backtrack and reverse its cuts.”
