"Today’s encouraging data will strengthen the case for a further interest rate cut before the end of the year. While underlying price pressures remain elevated, services inflation came in below the Bank of England’s expectations. As a result, we think the door remains open for one final cut in December this year, particularly once policymakers have more clarity on fiscal policy following the Budget, in addition to further expected loosening in the labour market.
“The upcoming Autumn Budget presents a two-sided risk to the inflation outlook. A repeat of last year’s tax hikes on businesses could potentially put upward pressure on domestic inflation, with firms likely to pass on some of that cost. However, the Chancellor could opt to hike taxes on households affecting consumer spending more directly. The impact of these taxes would likely see household incomes fall and could be disinflationary on balance.
“Inflation was unchanged at 3.8% in September, driven by transport prices. Inflation is projected to gradually ease, as recent temporary price pressures fade. If the recent decline in oil prices continues, motorists could see lower prices at the pump. Overall, we expect inflation to return to the Bank of England’s 2% target in the first half of 2026.”
