The Bank of England is expected to cut interest rates at its next meeting, on 18 December, as UK inflation appeared to have peaked, though economists disagreed over whether it would be the last in the current cycle.
UK consumer price inflation slowed to 3.6% in October, just below the previous month’s 3.8% but slightly above market consensus and Bank of England projections.
Deutsche Bank's chief UK economist Sanjay Raja said the headline consumer price index fell less than expected due to "still sticky and elevated food price momentum".
However, he emphasised the significance of a decline in services inflation to 4.5%, which the BoE's monetary policy committee monitors closely as a measure of underlying price pressure.
"The MPC now has a clearer path for a Christmas rate cut," Raja said.
James Smith, economist at ING, also noted that “headline inflation is undoubtedly past the peak,” but pointed to a renewed rise in food price inflation, which would be "read meat for the hawks" on the committee, who do not want to cut rates.
"Last month’s fall in food from 5.1% to 4.5% in annual terms looked a bit weird, and October’s rebound to 4.9% confirms that was indeed the case."
Smith said that while the short-term pickup in food prices may raise concerns, the longer-term trend suggests easing, with evidence from the eurozone of fresh food inflation falling, coupled with a levelling off in the producer price data for food products, "suggests inflation at the supermarkets is probably more or less at its peak".
Nonetheless, Smith said the food rebound "is likely to keep concern alive among the Bank’s hawks about the potential impact on inflation expectations.”
He added: "They worry that this could fuel a more persistent bout of price pressure, akin to what we saw two or three years ago.
"The hawks will point to restaurant/café prices, often seen as a bellwether for ‘persistence’ among services categories, where prices increased sharply on the month, potentially linked to the broader food price pressure."
Services inflation is generally heading in the right direction, if smoothing out the month-to-month volatility, with separate jobs market data showing wage growth in the private sector is "easing rapidly".
Looking ahead to the next rate decision, Smith said: "We doubt there’s anything that will shake the conviction of the Bank’s doves, who argue immediate easing is necessary to offset potential weakness emanating from the jobs market."
After a 5-4 vote in favour of holding rates at the preceding MPC meeting, he said "there’s unlikely to be anything in this data that will change the minds of many voters on the BoE committee" and he doubts the forthcoming Autumn Budget will change that either.
"That means the decision continues to hinge on Governor Andrew Bailey, who is somewhere between the two camps – though given he is more sympathetic to the view of the doves, we think he will still tip the balance in favour of a cut in December."
Deutsche's Raja agreed that Governor Bailey is likely to have the deciding vote for December.
With the labour market softening, GDP growth weaker than projected, and underlying inflation tracking a little lower than BoE expectations, Raja said he thinks Bailey will today "feel more confident about cutting Bank Rate below 4%".
Monica George Michail, associate economist at NIESR, also agreed that inflation has reached its peak and expects it to continue to slowly trend downwards, but was looking past next month to 2026 for the next rate cut or cuts.
She said she expects the MPC "to implement two rate cuts next year but will nevertheless remain cautious in assessing the speed at which inflation is coming down".
Like, Smith, she thinks the upcoming budget is less likely to be inflationary than the Chancellor's past two fiscal announcements.
"However, there remain some risks to the inflation outlook stemming from still-elevated pay growth and high household inflation expectations, as discussed by some MPC members in their November meeting."