UK inflation holds steady at 6.7% in September

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UK inflation held steady in September at 6.7 per cent, maintaining pressure on the Bank of England to hold firm in its efforts to curb price growth.

The rate of consumer price inflation had been forecast to fall to 6.6 per cent in the 12 months to September, according to economists polled by Reuters.

The figures underscore the battle ahead for the UK central bank as it tries to squeeze high inflation out of the economy with elevated interest rates after annual consumer price growth surged to its highest level since the 1980s.

The UK is grappling with a more persistent inflation problem than in many of its peers.

September’s year-on-year inflation rate exceeded those of France and Germany, as well as the most recent EU-wide and US rates of price growth. The IMF this month predicted the UK would register a higher rate than other G7 countries next year.

The sticky nature of UK prices rises is explained partly by higher wage growth than in the US and eurozone, after a post-Covid contraction in the size of the workforce boosted pressure on companies to lift pay.

Andrew Bailey, BoE governor, last week warned it was too soon to declare victory in the fight against inflation, even as traders bet that the central bank will halt further rate rises.

Officials have signalled that an extended period of high rates may be needed to tame inflation and return it durably to the bank’s 2 per cent target.

The core rate of inflation, which omits energy and food prices, eased to 6.1 per cent in the same period, according to the Office for National Statistics, down from 6.2 per cent in August but again slightly higher than forecast by economists.

The CPI figures showed price growth had been fuelled by factors including higher motor fuel prices and rates on hotel accommodation, offsetting downward contributions from food and beverage prices.

The all-services index of consumer prices rose 6.9 per cent in the year ended September, up from 6.8 per cent. This component is a closely watched gauge of underlying domestic pricing pressures in the economy.

Headline inflation is expected to fall sharply next month because of a cut in the cap on household energy prices and more favourable year-on-year comparisons.

Signs that food prices are declining month on month, a trend analysts expect to continue, should also ease price pressures.

The BoE held interest rates at 5.25 per cent at its most recent meeting last month, in the first pause after 14 consecutive rises since December 2021. The next bank rate announcement is expected in early November.

While the CPI figures were above forecasts, the headline reading is unlikely to tip the balance in favour of another rate increase, analysts said. The outlook was instead for a protracted period of unchanged rates.

The spectre of a widening conflict in the Middle East is a key risk factor in the outlook, with the recent jump in oil and natural gas prices suggesting inflation could be slower to subside.

The conflict could “restrain how far inflation falls next year”, Paul Dales, an economist at Capital Economics, said. “Together with a more gradual easing in core inflation and wage growth, this adds support to our view that the bank won’t cut interest rates until late next year.”

Jeremy Hunt, UK chancellor, said: “As we have seen across other G7 countries, inflation rarely falls in a straight line, but if we stick to our plan then we still expect it to keep falling this year.” The UK government has pledged to halve inflation by the end of 2023.

On Wednesday morning, sterling rose 0.1 per cent against the dollar as markets bet that rates might stay elevated for longer.

Separately, on Wednesday, UK residential rental costs increased at the fastest annual rate since records began seven years ago while house prices stagnated, according to official statistics.

Private rents rose 5.7 per cent year on year in September, up from 5.6 per cent in July, according to the Office for National Statistics.

The figures represent the largest annual percentage increase since the data series began in January 2016, and lay bare the continuing effect of high mortgage rates on the property market.

Annual private rental prices increased by 5.6 per cent in England, 6.9 per cent in Wales, and 6 per cent in Scotland last month.

The average UK house price increased by an annual rate of 0.2 per cent in August, down from 0.7 per cent in July and well below its peak of 13.8 per cent in July last year.