“Today’s figures show that headline inflation has come in at 3.6%, which is in line with expectations and reflects the continued easing of price pressures across the economy. Energy and restaurant and hotel costs helped to lower the headline rate but food inflation actually ticked up unexpectedly.
“Although the direction of travel is improving, the wider economic backdrop remains fragile. Growth has been subdued all year, and the labour market is now cooling at a faster pace. The economy is clearly at a point of significant risk as we move towards 2026. With quarter on quarter growth successively weakening through 2025, incoming significant tax hikes on both corporates and individuals could snuff out remaining limited optimism. Amidst rising unemployment , ill thought-out plans to target the tax relief on offer from salary sacrifice pensions not only store up greater problems for the future but also make workers even more expensive for companies who have already been hit hard by hikes to National Insurance and the minimum wage.
"With the Budget now seemingly at risk of missing already low expectations, economic growth seems likely to come under further pressure. The flipside to this is that persistently above-target inflation may come down earlier than expected, ushering in larger rate cuts in its wake. Markets had already been pricing a strong 80% likelihood of an interest rate cut in December. Today’s data reinforces the view that inflation is now on a clearer downward trajectory and that the Bank of England will have scope to continue easing policy.
“However, the return of inflation towards target is as much a reflection of slower activity as it is of any meaningful improvement in the supply side of the economy. While falling inflation provides some relief for households, it also highlights the challenge of generating stronger, more sustainable growth. Any rate cuts delivered in the coming months will be responding to an economy that is still struggling to build momentum.”
