UK Week in Review - 24th October
Martin Beck, Chief Economist | Economic Consulting and Analysis
A better week for the economy
In the run-up to the Budget on 26 November, it’s been hard not to feel some sympathy for a Chancellor buffeted by rising borrowing costs, policy U-turns, and mounting talk of fiscal “black holes” and a looming “debt crisis.”
But last week brought some respite. The latest data suggest the UK’s inflation problem may be less entrenched than feared, offering both political and economic breathing space. September’s public finance figures contained a few nuggets of good news. Retail spending has remained resilient despite headwinds, and recent business and consumer surveys were broadly positive.
Inflation: signs of a turn
Consumer price inflation held steady at 3.8% in September, unchanged from July and August, and notably below both Bank of England (BoE) and consensus forecasts for a rise to 4%. The downside surprise reflected a broad easing of price pressures:
Food inflation fell to a four-month low of 4.5%.
Core inflation eased to 3.5%, from 3.6% in August.
The Bank of England’s measure of underlying services inflation, a key measure of domestic price pressures, fell to 3.9%, its lowest in three and a half years (Figure 1).
Figure 1: Measures of underlying inflation fell in September
September’s reading likely marks the peak of the recent inflation uptick. Favourable base effects, especially from the cap on household energy bills, which rose much less sharply this month than a year ago, combined with cheaper oil and petrol, should push CPI lower through the rest of 2025. And the effect of tax and regulated price hikes earlier this year will drop out of the annual comparison in early 2026, pushing inflation down further.
Monetary policy: rate cuts back in view
The data reinforce our long-held view that the BoE will cut rates again before year-end. Investors now appear to agree, with markets now pricing in a ¼-point reduction in Bank Rate in December.
That shift has filtered through to the gilt market: 10-year yields have fallen by around 30 basis points since the recent high earlier this month. The OBR’s Budget forecast timetable means this move may have come too late to be reflected in the fiscal watchdog’s assumptions around government borrowing costs. But it is possible the OBR will revise its gilt rate forecast, as it has done previously when market conditions changed materially. If so, forecast debt interest spending could fall by £2-3bn, a helpful, if modest, improvement.
Fiscal outlook: some relief, but headroom pressures remain
September’s public finance figures also offered some tentative encouragement. Borrowing broadly matched the OBR’s expectations, avoiding a repeat of July’s overshoot, and the deficit in the fiscal year to date was revised down.
Monthly borrowing was £20.2bn versus an OBR forecast of £20.1bn.
Year-to-date borrowing stood at £99.8bn, £4.2bn below the ONS’s previous estimate but still above the OBR’s £92.6bn projection.
The current budget deficit was £71.8bn for the first half of 2025–26, versus an OBR forecast of £58.8bn.
These figures suggest some improvement, but not enough to materially ease the Chancellor’s task. We estimate she will need to tighten policy by around £20bn simply to restore the fiscal headroom against her key fiscal rule available at the March Budget. Additional tightening may be required to finance potential giveaways, such as a cut in VAT on fuel, and to rebuild a prudent buffer against economic shocks.
Growth: signs of consumer resilience
On the activity front, retail sales volumes rose again in September. This was the fourth successive monthly rise and left volumes at the highest since mid-2022 (Figure 2). Sales were up over Q3 as a whole, implying retail made a positive contribution to GDP. We continue to expect quarterly GDP growth of 0.4%.
Figure 2. Retail sales have seen sustained growth since June, but are still below pre-Covid levels
Survey data has also turned more upbeat. October’s flash PMI rose to 51.1 from 50.1 in September, pointing to slightly stronger momentum across services and manufacturing. The PMI’s measure of input cost inflation eased to its slowest since November 2024, while the GfK consumer confidence index rose in October to a joint-year high despite ongoing tax speculation.
Surveys often understate underlying strength when uncertainty is high, so the recent readings may be underplaying the economy’s resilience. And while any Budget tax rises could weigh on growth, several offsetting forces should help cushion the impact:
Scope for further BoE rate cuts to offset fiscal tightening.
Robust household and corporate balance sheets.
Positive external spillovers from looser policy in the US and Europe.
Lower oil and petrol prices, despite the week’s uptick after new US sanctions.
The bottom line
The mood music around the UK economy has brightened. Inflation appears to have peaked, government borrowing costs have eased, consumer spending is proving resilient, and the fiscal position isn’t quite as shaky as feared. We expect other forecasters to move closer to our above-consensus view for GDP growth this year and next.
But the Chancellor still faces a delicate balancing act in November: restoring fiscal credibility without stifling a fragile recovery.