UK inflation cools to 3.6% in October, boosting chance of a Christmas rate cut

U.K. CPI cooled to 3.6% in October (down from 3.8% in September) with core inflation easing to 3.4% as weaker gas and electricity prices and falling hotel costs offset rising food and raw-materials costs, the ONS said. Markets reacted mildly—sterling was flat and gilts slipped slightly even as the 30‑year yield remains above 5%—and the print strengthens expectations of a 25bp Bank of England cut in December (markets price ~80%), while offering political relief to Chancellor Rachel Reeves ahead of the Nov. 26 Autumn Budget. Economists caution the outlook hinges on budget measures (eg. energy levies, VAT) and persistent wage growth/weak productivity could keep inflationary pressures sticky, meaning the BoE will need to move carefully.

Analysis

The Office for National Statistics reported headline CPI cooling to 3.6% in October from 3.8% in September, while core inflation eased to 3.4% from 3.5%, with weaker gas and electricity price increases (after Ofgem cap changes) and a fall in hotel prices offsetting rises in food and raw-material costs. Sterling was unchanged versus the dollar and euro immediately after the print, and gilts slipped marginally across the curve even as the 30‑year yield remains above 5%, leaving the U.K. with the highest long-term borrowing costs in the G‑7.

Markets are pricing roughly an 80% chance of a 25bp Bank of England cut in December, a view reinforced by the slowing CPI and lacklustre 0.1% Q3 GDP print; the BoE had earlier expected inflation to peak near 4% in September. The data therefore increases near-term easing odds but keeps policy risk alive given persistent wage growth and weak productivity, which Schroders warns could entrench inflation.

The fiscal calendar is now the primary near-term determinant: Chancellor Reeves and markets are focused on the Nov. 26 Autumn Budget for measures (energy levies, VAT, duties) that Deutsche Bank and others say could materially lower 2026 inflation — potentially by as much as 0.5 percentage points — but fiscal consolidation or tax changes could also be disinflationary and affect borrowing costs. Investors should weigh a likely short-term downshift in rates against elevated sovereign yields and fiscal uncertainty, monitoring wage/productivity data and specific Budget policy announcements as key catalysts.

Key Decisions for Investors

• Consider tactical duration exposure to UK gilts ahead of a likely 25bp Bank of England cut in December, but size positions conservatively and hedge long‑term interest‑rate and fiscal risk given the 30‑year gilt yield above 5% and elevated sovereign borrowing costs
• Prioritise monitoring the Nov. 26 Autumn Budget for energy levy, VAT and duty changes, as these measures are the primary near‑term catalyst that could shave up to ~0.5 percentage points off inflation and re‑rate gilt and sterling markets
• Avoid large directional long positions in sterling until Budget details and the BoE decision crystallise; use FX hedges or relative G7 currency trades to manage event risk
• Watch incoming wage growth and productivity releases closely as the key risks to a durable disinflation path; if wage pressures remain elevated, be prepared to reduce duration and increase hedges