MUFG expects U.K. inflation to exceed 4% in early 2027 if the January household energy price cap rises as it forecasts, adding pressure ahead of the Bank of England's November rate decision.
The Office for National Statistics (ONS) said the Consumer Prices Index rose 3.5% from a year earlier in September, compared with 3.1% in August. Motor fuel prices drove transport's leading contribution to the increase in the annual rate. Core inflation rose to 2.8% from 2.6%, while services inflation climbed to 3.7% from 3.4%.
MUFG Europe economist Henry Cook expects a 0.25-percentage-point rate increase in November and a further rise in early 2027. MUFG senior currency analyst Lee Hardman said the latest inflation reading “should seal the deal for a hike next month.” He also expects further near-term gains for the pound.
The Bank kept Bank Rate at 3.75% in September, with six policymakers voting to hold and three favoring a quarter-point increase. It said energy costs raised inflation risks but had found limited evidence of those costs spreading broadly into pay and other prices. Bank of England Governor Andrew Bailey said tighter policy might be needed if the Middle East conflict persisted and the risk of that wider spread increased.
The Office of Gas and Electricity Markets (Ofgem) estimated that its Oct. 1-Dec. 31 cap raised costs by 4% for a typical household using electricity and gas on a default tariff and paying by direct debit. Actual bills vary, and customers on fixed tariffs are unaffected by the cap change. Ofgem linked the rise to higher wholesale gas prices associated with the Middle East conflict.
The wider economy has offered mixed signals. Gross domestic product grew 0.7% in the three months to August but only 0.1% in August from July, the ONS said. Provisional payroll figures showed 13,000 more employees in September than in August, but 66,000 fewer than a year earlier. The September estimate may be revised.
A separate Brown Brothers Harriman outlook also anticipates a November rate increase after the September inflation report.
The Bank's next rate decision is due Nov. 5, followed by the next ONS inflation release Nov. 18. Ofgem plans to announce the January-through-March cap by Nov. 25; it has not set that cap yet.
