UK inflation rate held at 6.7 per cent in September

Economists had expected a modest fall, and some now predict a rise in interest rates in November

A shopper walking through the aisle of a supermarket. UK inflation in September was at the same rate as the previous month. PA

Inflation in the UK stayed at 6.7 per cent in September, following the same reading in August, according to the Office for National Statistics.

Core inflation, which excludes energy and food prices, stood at 6.1 per cent in the 12 months to September, down from 6.2 per cent in August.

Economists had predicted a slight fall in the headline consumer price index. Given the small decrease in the core reading, some said the chances that the Bank of England's Monetary Policy Committee would raise interest rates at its meeting in early November have increased.

Stuart Cole, chief macro economist at Equiti Capital, said the “disappointing” CPI numbers suggest the Bank of England “still has work to do, if it is to bring CPI back to its 2 per cent target in a timely manner”.

“The figures may raise question marks over the wisdom of the Bank of England’s decision to keep rates on hold last month and whether or not the split nature of the Monetary Policy Committee is hampering the Bank's ability to bring CPI back to target,” he told The National.

“Certainly, today’s numbers are likely to provoke concerns that a further rate rise may yet be delivered, particularly when taking into account yesterday’s wages data which, while slowing, are doing so at only a gradual place.”

Britain's Chancellor Jeremy Hunt expects inflation to “keep falling this year” but said it “rarely falls in a straight line”.

On a monthly basis, CPI rose by 0.5 per cent in September, the same rate as in September last year, the ONS said.

Food prices, which fell for the first time since September 2021, provided the largest downward pressure on overall inflation while rising petrol and diesel prices provided the biggest upward pressure.

Rising prices in the hotel sector also added to the upward pressure on inflation, the ONS said.

Bumpy downward journey

“It is clear the inflation battle is far from over, with wage growth now outstripping inflation and rising geopolitical tensions putting further pressure on fuel and energy prices,” said Alice Hain, personal finance analyst at Bestinvest.

“The pace of wage growth is easing, however, with total pay including bonuses dropping back to 8.1 per cent in the three months to August, down from 8.5 per cent in the previous period – a reflection of the weakening effect of 14 interest rate rises on the labour market.”

The Confederation of British Industry said the recent rise in the price of oil and domestic price pressures in the UK may mean that inflation's downward journey may now be “bumpier” than previously expected.

“It’s still very likely that interest rates are close to their peak, with the stance of monetary policy now judged to be restrictive,” said Alpesh Paleja, the CBI's lead economist.

“The bank has signalled that rates are unlikely to be cut anytime soon, however, so households and businesses should plan for tighter financial conditions persisting.”

The pound strengthened a little on the inflation news. Sterling rose 0.18 per cent to $1.2206, having briefly touched $1.2208 immediately after the CPI numbers were released.

Household budgets

Analysts said that household budgets will continue to be stretched, even though food price inflation has been coming down in recent months.

The ONS said that food prices fell by 0.1 per cent between August and September this year, compared with a rise of 1.1 per cent between the same two months last year.

This meant the annual rate of food inflation in September was 12.2 per cent, down from 13.6 per cent in August and well below the 45-year high of 19.2 per cent it hit in March.

“This slight easing of grocery inflation is welcome, but it’s still taking a heavy toll on household budgets,” said Kevin Bright, global leader of the consumer pricing practice at McKinsey and Company.

“Slowing price increases in most food categories, alongside fierce supermarket competition will have had an impact on shoppers’ food baskets.

“But with sugar up nearly 60 per cent – and a potential sugar shortage in the coming months – we could see confectionary prices impacted.”

Bricklayers on a Barratt Homes development site. David Thomas, chief executive of Barratt, said on Wednesday: "The trading environment remains difficult, with potential homebuyers still facing mortgage challenges."

Mortgage worries

Many analysts are concerned that the stubbornness of inflation points to further increases in interest rates and thus rises in mortgage rates.

Recently, large UK lenders have been offering mortgage products with rates of below 5 per cent.

However, with the prospect of another rise in interest rates from the MPC by the end of the year, Ben Thompson, deputy chief executive of Mortgage Advice Bureau, said it was “unlikely that these [mortgage] rates will drop further anytime soon”.

Justin Moy at EHF Mortgages told Newspage that oil prices probably be the main contributor “to bumpy inflation for the next few months”.

“These are factors outside of our control but borrowers may end up paying for it,” he said.

Meanwhile, the UK largest housebuilder, Barratt repeated that it will build 20 per cent fewer homes this year than in 2022, because of reduced affordability brought about by successive rises in interest rates and the cost-of-living crisis.

“The trading environment remains difficult, with potential homebuyers still facing mortgage challenges,” Barratt chief executive David Thomas said on Wednesday.

Barratt's total forward sales, a crucial number when determining near-term demand, stood at 9,221 homes as of October 8 down about 31 per cent year on year.