The pound drifted lower on Wednesday as fresh inflation data reinforced expectations that the Bank of England will finally cut interest rates next month, despite market unease over Labour’s tax-heavy economic strategy.
Sterling dropped to 1.313 dollars and 1.134 euros after consumer price inflation moved down from 3.8 percent to 3.6 percent. It was the first decline since May.
Markets Expect a December Rate Cut
Economists said the latest figures make an interest rate cut in December very likely. Analysts at Deutsche Bank said the Bank of England now has a clearer path to lower borrowing costs. JP Morgan said the previous vote to keep rates unchanged was extremely close and that the latest numbers strengthen the case for action next month.
Financial markets are now pricing in an eighty percent chance of a quarter point reduction.
Labour Accused of Keeping Prices Higher
Economists warned that inflation in Britain remains much higher than in the euro area, where the rate has fallen to 2.1 percent.
The gap is being linked to Labour’s decisions in the previous Budget, which increased costs for employers and businesses.
Julian Jessop of the Institute of Economic Affairs said it is far too soon to declare victory over inflation. He said that many of the cost pressures holding inflation above the two percent target can be traced back to Labour tax increases introduced last autumn. Companies have passed many of these higher costs on to consumers.
Rachel Reeves raised taxes by 40 billion pounds in the previous Budget. This included higher employer National Insurance contributions.
Some analysts warned that part of the drop in inflation was caused by short term factors. Hotel prices fell sharply in October while broadband charges and smartphone prices were lower due to discounts. These movements are expected to reverse in the coming months, which could slow further progress on inflation.
Energy Bills Continue to Rise
The fall in inflation came even as households faced higher energy bills in October. The Ofgem price cap increased, although by less than the large rise seen at the same time last year. This helped bring the annual inflation figure down.
Energy analysts warned that bills are likely to rise again next year. They said that Labour’s net zero levies will become a major driver of energy costs and could push bills higher from April.
Food and drink prices rose again in October. Food inflation increased from 4.5 percent to 4.9 percent and prevented the overall inflation rate from falling further. The Office for National Statistics said food prices are being pushed up by packaging costs, climate pressures and higher input prices faced by producers.
The FTSE 100 opened 0.1 percent higher at 9,558.67 while the FTSE 250 gained 0.2 percent. Traders welcomed signs that interest rate cuts may finally be approaching but remain cautious ahead of next week’s Budget.
Conservatives Say Labour Made Inflation Worse
The Conservatives said Labour’s previous Budget has fuelled inflation and hurt working families. Shadow chancellor Sir Mel Stride said that inflation has been above target every month since Labour came to power and blamed Labour for higher borrowing and higher taxes.
Economists also said that the Budget on November 26th could be the final barrier to a rate cut. They warned that any new Labour measures that increase business costs could give inflation new momentum.
Reeves Defends Her Plans
Rachel Reeves said the fall in inflation was good news but said more work is needed to bring prices down. She said she would make fair choices in the upcoming Budget, which is expected to include further tax increases.
