UK Inflation Inflation Rate Slides to 1.7% in September Boosting Rate Cut Bets

UK Consumer Price Inflation Report for September 2024

On Wednesday, October 16, the crucial UK Inflation Report impacted expectations around potential Bank of England rate cuts, which could be more aggressive.

The UK’s annual headline inflation rate dropped from 2.2% in August to 1.7% in September, falling below the BoE’s 2% target range. Economists had expected an inflation rate of 1.9%, highlighting the significance of the fall.

According to the Office for National Statistics:

• The Consumer Prices Index, including owner-occupier housing costs (CPIH), rose by 2.6% in the 12 months to September, down from 3.1% in August.
• Airfares and motor fuels had the largest negative impact on the CPIH and CPI annual rates.
• Conversely, food and non-alcoholic beverages had the largest positive contribution.
• The Core CPIH (excluding energy, food, alcohol, and tobacco) rose by 4.0% in the 12 months to September, compared with 4.3% in August.
• Core CPI (excluding energy, food, alcohol, and tobacco) eased from 3.6% in August to 3.2% in the 12 months to September.
• The CPI goods rate fell from negative 0.9% to negative 1.4%, while the CPI services annual rate eased from 5.6% to 4.9%.

Softer Inflation and Wage Growth Overshadow the Tighter Labor Market

The inflation figures follow Tuesday’s UK Labor Market Overview Report, which showed a further slowdown in wage growth. The combination of softer inflation and weaker wage growth could intensify speculation about BoE rate cuts in November and December.

Softer wages may reduce disposable income, leading to weaker consumer spending, which in turn could further dampen inflationary pressures. However, weaker private consumption may also impact the economy as it contributes over 60% to the UK GDP.

Bank of England and Monetary Policy

The next BoE monetary policy decision is on November 7. Nevertheless, Bank of England Governor Andrew Bailey recently spoke about cutting interest rates more aggressively if inflation remains low. The declines in headline and core inflation are likely to boost bets on BoE rate cuts in November and December.

GBP/USD Reaction to the September UK Inflation Report

Ahead of the UK inflation report, the GBP/USD fell to a pre-report low of $1.30594 before briefly rising to a high of $1.30768.

However, after the release of the inflation report, the GBP/USD rose to a high of $1.30732 before tumbling to a low of $1.30135. The sell-off reflected rising bets on more substantial BoE rate cuts aimed at stabilizing prices.

On Wednesday, October 16, the GBP/USD was down 0.43% to $1.30165.