British inflation eased slightly in October for the first time in months, official data showed on Wednesday, offering some relief to the government before the widely anticipated annual budget next week and boosting the chance of a December rate cut by the central bank.
Consumer price index (CPI) dropped to 3.6% in October from 3.8% in September, its joint-highest since January 2024, the Office for National Statistics (ONS) said. The fall was in line with forecasts from both the Bank of England (BoE) and economists polled by Reuters.
Sterling weakened modestly against the U.S. dollar after the data, two-year gilt yields fell and interest rate futures priced in a slightly faster pace of rate cuts for 2026.
"With inflation now on what should be a sustained downward path, economic growth softening, and next week's budget likely to deliver a significant fiscal tightening, the conditions are in place for a BoE rate cut in December," Martin Beck, chief economist at WPI Strategy, said.
The BoE paused its quarterly pace of rate cuts earlier this month and Treasury chief Rachel Reeves has said she will seek to avoid tax and spending measures that might add to inflation in her annual budget on Nov. 26.
"Cost of living is still a big burden on families right across the country, and that's why, in the budget next week, I'll be taking targeted action to bring down inflation to address the cost of living," Reeves said after Wednesday's data.
Some economists estimate that measures announced at last year's budget, including a higher minimum wage, increased taxes on employers and other levies, have added as much as 1 percentage point to Britain's inflation rate, which remains the highest among major advanced economies.
Earlier this month, the BoE forecast inflation would stay above its 2% target until mid-2027, largely due to wage growth that is faster than many BoE policymakers think is consistent with on-target inflation, given sluggish productivity growth.
Higher labor costs have been particularly felt across much of Britain's services sector.
Services price inflation, which is watched closely by the BoE as a guide to longer-term domestic price pressures, fell slightly more than expected to 4.5% in October, its lowest since December 2024 and down from 4.7% in September.
Lower household electricity and heating bills and cheaper hotel room prices pushed down on inflation in October, the ONS said.
Core CPI, which excludes volatile food, energy, alcohol and tobacco prices, slowed as expected to 3.4% in October from 3.5%.
However, food and drink inflation, which the BoE expects to reach a peak of 5.3% in December and views as influential on households' expectations for future inflation, rose to 4.9% in October from 4.5%.
Separate figures from the ONS, published on Wednesday, showed factory gate prices rose by 3.6% in the 12 months to October, up from 3.5% in September.
A BoE rate cut on Dec. 18 after its next meeting is not a completely done deal. The central bank's Monetary Policy Committee (MPC) voted 5-4 against cutting rates in November.
While Governor Andrew Bailey indicated at the time he was open to voting for a cut if more evidence emerged this year showing a reduction in underlying price pressures, chief economist Huw Pill said on Tuesday that he did not expect near-term data to shift his view due to still-high pay growth.
ING economist James Smith said the bigger-than-expected drop in services inflation reflected volatile airfares, which might be discounted by some policymakers.
"The hawks will point to restaurant and cafe prices, often seen as a bellwether for 'persistence' among service categories, where prices increased sharply on the month, potentially linked to the broader food price pressure," he said.
