Rising energy costs have led to an unexpected jump in UK inflation, raising concerns among policymakers and economists.
- The Consumer Price Index reached 2.3% in October, surpassing both forecasts and previous months’ figures.
- Housing costs, due to increased gas and electricity prices, significantly contributed to this inflation rise.
- Despite the rise, the recreation and leisure sectors showed a decrease in inflationary pressure for the first time in two years.
- Monetary policymakers are divided on how to tackle inflation moving forward, amid expectations of limited rate cuts.
The Office for National Statistics (ONS) reported a rise in the UK’s annual Consumer Price Index (CPI) to 2.3% in October, marking an increase from the 1.7% seen in September. This inflation rate is the highest recorded since April and has surpassed the forecasts of economists, which predicted a rate of 2.2%. The Bank of England’s projection was 2.1%. Higher energy prices, spurred by Ofgem’s decision to raise the energy price cap, were a central factor driving this rise.
Housing-related costs, reflecting the elevated prices for gas and electricity, emerged as the largest contributors to this inflation push. Additionally, smaller surges were noted in transport, furniture, and restaurant prices. However, inflation in the recreation and leisure sectors decreased, making its smallest impact on the price basket in two years. Chief economist at the ONS, Grant Fitzner, noted that a fall in prices for live music and theatre tickets partly offset the inflation increase, alongside decreasing raw material costs for businesses, primarily led by lower crude oil prices.
Key components of inflation also saw increases in October. Notably, the services sector inflation went from 4.9% to 5%, aligning with the Bank of England’s forecasts. Meanwhile, core inflation, which excludes the volatile food and energy sectors, rose from 3.2% to 3.3%, defying expectations that it would drop to 3.1%. The Bank of England’s Governor, Andrew Bailey, highlighted that the current service sector inflation does not align with the bank’s medium-term target of 2%. There is ongoing debate among the Bank’s Monetary Policy Committee members regarding the implications of these figures on future policy decisions.
Despite two interest rate cuts earlier this year, which reduced rates to 4.75%, policymakers are divided over the next steps to curb inflation. Expectations are currently set for a maximum of four rate cuts in 2025, potentially dropping the base rate to 3.75%. The UK’s inflation rate, now at 2.3%, compares with an average rate of 2% in the eurozone and 2.6% in the United States.
The increase in inflation, largely driven by higher energy costs, poses a significant challenge for UK economic strategy moving forward.
