The headline rate of UK inflation for October came in higher than expected at 2.3%, according to figures released by the Office for National Statistics on Wednesday. Higher gas and electricity prices were seen as the main contributor by the ONS, coming after Ofgem lifted its price cap on Oct. 1 by 10%.

This was above the 2.2% rate consensus forecast and takes the Consumer Price Index above the official Bank of England target of 2%. In September the rate of inflation was 1.7%, so October’s reading is a significant increase.

Core inflation, which excludes energy, food, alcohol and tobacco, also rose by more than forecast to 3.3%, against FactSet forecasts of a 3.2% rate. Along with a rise in services inflation to 5%, the increase in core CPI will concern the Bank of England, which is expected to hold interest rates on Dec. 19.

Michael Field, European market strategist at Morningstar said: “Today’s reading should not alter the Bank of England’s approach to their task of bringing interest rates back down to a more normalized level. While we clearly cannot be too cavalier about price pressures at this point, the likelihood of another material jump in inflation from here appears to be low.”

This year, UK CPI has fallen from 4% in January to a low of 1.7% in September, a trajectory that has encouraged the Bank of England to cut rates from the peak of 5.25%.

Inflation Will Keep Rising

This was the first inflation reading since the Oct. 30 Budget and Nov. 7 Bank of England meeting, where interest rates were cut from 5% to 4.75%. That was the second rate cut this year after a previous cut in August.

“The recent inflation numbers will support Bailey’s call for a gradual pace at cutting interest rates, with the BoE now expected to keep rates on hold at the next MPC meeting in December, and probably continue the easing cycle in February of 2025,” said Joaquin Thul, economist at EFG Asset Management, in a note published Nov. 20.

The Bank of England now forecasts that the Budget’s new fiscal measures will add 0.50 percentage points to CPI and boost GDP by 0.75 percentage points.

Even before the Budget measures, however, inflation was expected to rise again into 2025 because of tougher comparisons with 2023, after dropping below the 2% target in recent months.

UK inflation peaked above 11% in 2022 and has fallen sharply since. In the same period, Bank of England interest rates rose from 0.1% in December 2021 to 5.25% in August 2023.

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