UK inflation update: Inflation undershoots

Coming in weaker than expected, the UK Consumer Price Index (CPI) remained at 3.8% year-on-year in September, against consensus, and Bank of England (BoE) staff, expectations of 4.0% year-on-year. Core inflation fell a tenth of a percent to 3.5%, rather than rise as expected. Services inflation stayed at 4.7% year-on-year (consensus: 4.8% year-on-year). Retail Price Index (RPI) also undershot consensus by two tenths of a percent at 4.5% year-on-year in September after 4.6% year-on-year last month in August.

Clearly all these inflation rates are still high when set against a 2.0% year-on-year inflation target, but a slightly softer than expected set of inflation data will likely come as some relief to the BoE (and to the government, who use the September print  to uprate various benefit payments). September had been expected by BoE staff to mark the peak of inflation this year and for inflation to fall thereafter. That was what I had been pencilling into my forecasts too.

Higher food inflation this year is a particular concern as a potential driver of inflation expectations.

Looking at the main drivers of the change in inflation this month, upward pressure from transport (fuel, air fares) was offset by negative contributions from a raft of categories – the largest being recreation and culture (the largest downward effect within that came from live music) as well as food and non-alcoholic beverages. If the downward pressures were only from the recreation and culture component it would be easy to look through this (the live music component can move around depending on who is touring in the UK in a particular month) but it is more encouraging that downward pressures came from a number of components. If this marks the peaking of food inflation, that would also be seen as positive by the Monetary Policy Committee (MPC), considering higher food inflation this year is a particular concern as a potential driver of inflation expectations.   

I have not been forecasting a rate cut in November and have been assuming that the BoE returns to rate cuts in early 2026. Still, pulling together some of the recent UK data, including today’s inflation figures, and November’s decision may be a close one and a rate cut cannot be ruled out. CPI inflation still looks likely to fall from here, but now from slightly lower levels. Helpful negative base effects and slower wage inflation both help in my forecasts. UK inflation remains elevated for now though and the MPC may require quite a bit more evidence before lowering their guard again inflation persistence.

Contributions to change in the CPIH annual inflation rate, UK, between August and September 2025

Source: Consumer price inflation from the Office for National Statistics

UK: Headline, Core, Core Goods & Services Inflation

Source: Source: LSEG Datastream as at 15/08/2025

For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.