Inflation in UK unchanged at 6.7% in Sept, still way more than BoE's target

Inflation in the UK held steady at 6.7 per cent in September as easing food and drink price rises were offset by higher prices at the pump for motorists, official figures showed Wednesday.

The flat reading reported by the Office for National Statistics was disappointing as most economists had predicted another, albeit modest, fall.

It means that the UK's inflation rate remains more than three times higher than the Bank of England's target rate of 2 per cent.

The bank, though, is not expected to raise interest rates at its next policy meeting in early November, opting instead to keep its main borrowing rate unchanged at the 15-year high of 5.25 per cent.

 

Last month, the bank brought an end to nearly two years of interest rate rises as inflation fell from multi-decade highs above 11 per cent.

Most economists expect a sizeable decline in inflation next month.

Progress on falling inflation has stalled, for one month at least," said James Smith, research director at the Resolution Foundation think tank. It should fall sharply next month to below 5 per cent, as energy prices fall for most people.

The Bank of England, like other central banks, has raised interest rates aggressively from near zero as it sought to counter price rises first stoked by supply chain issues during the coronavirus pandemic and then Russia's invasion of Ukraine, which pushed up food and energy costs.

Higher interest rates, which cool the economy by making it more expensive to borrow and bearing down on spending, have contributed to bringing down inflation worldwide.

Though most economies have avoided falling into recession, fears remain that the British economy could start to see output shrinking in coming months, hardly the best backdrop for the governing Conservative Party ahead of a general election.

The UK has the highest inflation rate among the Group of Seven leading industrial economies the US's rate for example is 3.7 per cent.

Some economists attribute that to Britain's departure from the European Union, which has created worker shortages in some sectors and frictions in trade, raising costs for businesses.

The flat reading will raise concerns, certainly among homeowners, that rates will stay higher for longer.

Because there is a lag between actual rate hikes and mortgage rates, lots of homeowners and renters have yet to see increases in their housing costs.

Unlike in the US, for example, most homeowners in Britain lock in mortgage rates for only a few years, so those whose deals expire soon know that they face much higher borrowing costs in light of the sharp rise in interest rates over the past couple of years.