UK inflation falls for the first time in seven months! Expectations of interest rate cuts by the central bank are rekindled, while the fiscal budget becomes a new variable.

Inflation in the UK has dropped for the first time in seven months, signaling that price pressures have peaked before key decisions are made by the Bank of England and Chancellor of the Exchequer Rishi Sunak. Data from the UK's Office for National Statistics on Wednesday showed that the Consumer Price Index (CPI) rose by 3.6% year-on-year in October, down from 3.8% in September. The data was slightly higher than the 3.5% expected by economists in the City of London, but in line with the Bank of England's forecast. The inflation rate dropped to its lowest level since June, mainly driven by energy price increases lower than the same period last year. Service inflation also slightly decreased to 4.5% - a data point closely monitored by the Bank of England and lower than its expectations. These data have reignited expectations in the market for the Bank of England to cut interest rates before Christmas at their next meeting. With traders focusing more on service inflation data, the pound fell by 0.1% against the dollar to $1.313. "Evidence of inflation peaking should prompt the Bank of England to cut rates in December," said Schroders senior economist George Brown. However, the path to rate cuts still faces significant obstacles, especially with the Autumn Budget to be announced by the Labour government next week. Sunak has pledged to curb high inflation through fiscal measures, but the tax hike measures being considered may complicate the Bank of England's decision-making. In response to the inflation data, Sunak stated, "A fall in inflation is good news for households and businesses nationwide, but I am determined to take further action to lower prices." She reiterated that tackling the cost of living will be a priority in the budget on November 26. Schroders economist Brown pointed out that if VAT and environmental taxes were removed from household energy bills, the inflation rate could drop by 0.5 percentage points. During the summer, inflation in the UK reached nearly double the Bank of England's 2% target due to factors such as regulated prices, tax increases, and energy and food bills. This raised concerns among policymakers about sustained cost pressures. However, weak job market and sluggish growth in the UK have increased expectations for further rate cuts. Grant Fitzner, Chief Economist at the Office for National Statistics, stated that the slowdown in October's inflation was "mainly driven by natural gas and electricity prices," and hotel prices also put downward pressure on the data. However, grocery prices - a key concern for the Bank of England - served as a counterbalance. ONS data showed that inflation for food and non-alcoholic beverages accelerated to 4.9%, up from 4.5% in the previous month, mainly driven by products such as bread, meat, fish, and vegetables. Official data shows that the annual inflation rate was still declining between April and May. However, the ONS earlier this year indicated that the 3.5% estimate in April was overestimated by 0.1 percentage points due to data errors, meaning that the inflation rate remained flat during those two months. Therefore, the October data marks the first CPI decline in seven months since March.