Further rate rises back on the cards as inflation holds at 6.7%

CPI inflation remained at 6.7% for the second consecutive month in September, contrary to economists’ expectations of a reduction.

Today's ONS data shows that CPIH inflation, which includes occupiers' housing costs, also held steady at 6.3% in the 12 months to September.

Rising prices for motor fuel made the largest upward contribution to the change in the annual rates.

This was offset slightly by food and non-alcoholic beverages, where prices fell for the first time since September 2021.

Core CPI (excluding energy, food, alcohol and tobacco) rose by 6.1% in the 12 months to September, down from 6.2% in August

On a monthly basis, both CPI and CPIH rose by 0.5% in September.

Industry experts have warned that sticky inflation figures could cause the Bank of England to raise Bank Rate at its next meeting next month.

Mark Taheny, senior director at specialist financial advisory Centrus, said: “Falling gas prices have been one of the main drivers in the UK’s inflation levels declining in recent months, but a sudden gas price hike this month - with wholesale prices reaching their highest levels since February 2023 – will likely renew pressure on the Bank of England. This rise is driven by a combination of factors, including Israel’s recent halting of production at its Tamar gasfield and Finland’s Balticconnector pipe leak, plus the continued squeeze on global supplies driven by the Ukraine war and the knock on impact of oil supply cuts from Saudi Arabia and Russia. Future gas contracts foresee wholesale prices rising almsot 30% in the new year, which risks derailing the fight against inflation as evidenced in today's statistics and sustaining the high interest rate environment."

Paul McGerrigan, CEO at Loan.co.uk, commented: “Contrary to economists’ expectations of a reduction, the economy has thrown another curveball with the rate of inflation digging its heels in and remaining at 6.7% for a second month.

“This has mainly been caused by a significant rise in costs at the pumps after oil rich countries limited the supply of fuel to increase prices and profitability.

“On the positive side, core inflation - which excludes energy, food, alcohol and tobacco - fell slightly, down from 6.2% in August to 6.1% in September.

“However, a 0.1% dip is unlikely to appease the Bank of England's Monetary Policy Committee which will want to see rates under tighter control. It looks likely members will vote to hike interest rates by another 0.25% or more to tighten the screw on inflation when they meet in a fortnight – but by doing so they also tighten the vice on borrowers, mortgagees on SVRs and those coming to an end of their fixed rates will be watching with bated breath.”

Nathaniel Casey, investment strategist at wealth manager Evelyn Partners, said: "Despite the recent rise in crude oil prices pushing fuel prices higher, and this pause in monthly falls in annual inflation, we think the broad downward trend in inflation remains intact. The cooling labour market conditions are reducing the risks of a wage price spiral materialising.

"Although the BoE left interest rate unchanged at their last monetary policy meeting, money markets continue to price in a 50/50 chance of one more rate hike at some point over the coming quarters. Regardless of whether they deliver one more hike or not, we’re unlikely to see rate cuts materialise before the tail end of 2024."

Marcus Brookes, chief investment officer at Quilter Investors, added: “UK inflation’s march back down to target can very much be described as ‘slow and steady’, with CPI refusing to budge in September at 6.7%. Clearly the UK is not winning any races with this trajectory as inflation still remains incredibly elevated and much more so than peers. With geopolitical tensions rising, energy and petrol prices are once again on the way up and inflationary pressures risk hitting an economy that has gone through a painful cost of living crisis. For now, the higher for longer interest rate narrative will continue to persist.

“However, while wages are now rising faster than prices, for many the pain is yet to be truly felt and the Bank of England is in a difficult position. It paused on raising interest rates at its last meeting, but this reading means we are likely to see at least another rate rise. The question becomes when they have done enough, but with inflation taking so long to come back down to more palatable levels that is a difficult question to answer and risks policy misstep. We think the Bank of England has done enough and will be led by external factors, such as the Federal Reserve, but they will not want to appear to be doing nothing, especially when inflation remains so high.

“This elevated period of inflation and interest rates also makes the economic pain and potential recession more likely in 2024. GDP growth is already faltering and it will take a big effort for a recession to be avoided. The pain may have been deferred to 2024, but as such the BoE will be required to act sooner than it may like or expect to I imagine.”

However Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, was more upbeat, stating that "September’s slight uptick will not become inflation’s revival": “Though inflation saw a timid increase of 0.5% in September, this is unlikely to spiral into a full revival and will not unduly perturb the Bank of England ahead of the next rate setting decision.

“September’s upward trend can be attributed to an increase in fuel prices, which may yet be exacerbated by the escalating conflict in the Middle East. Underlying inflationary pressures have been steady throughout the year, but the back-to-school season and increased private school fees may have also contributed to September’s spike.

“However, despite today’s figures there are signs that inflation will continue to subside in the coming months. The slower increase in food prices will be a welcome relief to hard-pressed households, while the sharp fall in the OFGEM energy price cap will further reduce price pressures in October.

“Economic activity remains subdued and the labour market is slowly loosening, indicating that inflation should fall enough to hit the government’s desired year-on-year target of 5% or lower by December.”