As UK inflation stalls at 3.8%, TechBullion spoke with Daniela Hathorn, senior market analyst at Capital.com about what these figures mean for investors, traders and the wider economy.
UK headline CPI remained at 3.8% year-on-year in September, defying consensus for a re-acceleration to 4.0%. The composition was mildly encouraging with core inflation undershooting expectations, flat month-on-month readings for both headline and core, and disinflation in food offset by higher fuel. Markets read the print as a small step toward the Bank of England’s target and pulled forward rate-cut hopes, with gilts firmer and sterling softer on the day.
Two caveats keep the BoE cautious. First, services inflation held around 4.7%, still far above the 2% target and closely watched as a proxy for domestic pressure. Second, yesterday’s benign headline follows two months at the same 3.8% pace; it signals stability, not mission accomplished. The upshot is a higher probability of a December cut, but policymakers will likely want at least one or two further soft prints in services and pay before acting decisively. The timing may still be uncertain, but at least the direction of travel – toward easing – seems to have been reinforced by this release.
The data also managed to calm some fears about stagflation, which is weak growth plus rising inflation.
The UK clearly has soft growth dynamics, but inflation is not necessarily rising; it’s stuck at 3.8% and drifting lower on trend, albeit rather slowly. That’s more consistent with a “sticky disinflation” regime than a renewed price spiral. The risk would increase if services stayed near 5% while activity data rolled over further. So, for now, the latest CPI mix (food disinflation, steady core) reduces the probability of a stagflation narrative re-emerging this winter.
Market impact
FX (GBP): Softer inflation prints typically cap rallies in sterling versus USD and EUR with range-trading bias persisting until data re-accelerate or the BoE pushes back. Meanwhile, BoE vs BoJ divergence will keep the focus on GBP/JPY; a BoE easing path alongside any BoJ normalization would favour downside in GBP/JPY.
Equities: A disinflation and easing mix tend to help rate-sensitives stocks like homebuilders and utilities, and those stocks most exposed to the UK economy. Banks face medium-term NII compression as cuts arrive, partially offset by lower funding costs and better credit.
Moving forward, the base case is that inflation edges lower from 3.8% as goods disinflation continues and services gradually cool, allowing the BoE to begin cutting. For traders, the cleanest tells are services CPI, pay growth, and front-end gilt pricing as these will set the tone for UK assets into year-end. A clear downshift in services CPI opens the door to a December cut whilst sticky prints push the first cut into 2026.
Daniela Hathorn is a senior market analyst at Capital.com
