Inflation in the UK came in at 3.6% in October, 20 basis points lower than the 3.8% recorded in the previous three months.
It’s the first time that inflation, as measured by the Consumer Prices Index, has fallen since May, and the largest fall since March.
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Most analysts correctly expected October to see a lower level of inflation than previous months, forecasting a reading of around 3.5% and 3.6%.
Inflation falling in line with expectations is also an early sign that economists seem to have been correct in predicting September would be the last month in 2025 before inflation started to sustainably decrease – though, of course, a surprise rise could scupper this.
We look more closely at where prices are heading next.
When will inflation come down?
October’s reading suggests inflation may have peaked in 2025.
In September, the Bank of England expected inflation to reach 4%, where it would peak before falling again. However, inflation remained static at 3.8% in September, in a surprise boost.
The latest data showing price growth has slowed by 20 basis points suggests the central bank was correct about inflation starting to decline in October.
The Bank of England’s most recent Monetary Policy Report, published in August, said it expects inflation to average 3.75% in the second half of 2025.
The central bank then expects inflation to fall to 2.7% by the third quarter of 2026, and finally settle back around the 2% target by the second quarter of 2027.
While the Bank of England’s inflation forecast is one of the most closely watched, other organisations also try to predict inflation.
Deutsche Bank forecasts that inflation will average 3.4% in 2025, before stepping down to 2.6% in 2026. The bank expects a particularly large step down in services inflation next year, going from an average of 4.8% in 2025 to 3.4% in 2026.
The median expected inflation reading for the last quarter of 2025 among economists surveyed by the Treasury on 19 November was 3.4%.
Meanwhile, the median expected inflation rate among the same forecasters for Q4 2026 is 2.3%. All forecasters surveyed said they anticipate inflation will be lower in Q4 2026 than Q4 2025.
What’s the link between inflation and interest rates?
Inflation above the 2% target is always a cause for concern for economists, policymakers and consumers.
The Bank of England is particularly concerned about inflation, as it has a remit to guide and control inflation so prices do not spiral out of control.
This is largely done through influencing interest rates, which are typically raised to fight inflation.
Broadly speaking, the trade-off to fighting inflation with higher interest rates is reduced economic activity. When interest rates are high, people have to use more of their earnings on expenses like their mortgage and are incentivised to save their cash as savings rates tend to be higher.
However, despite inflation being forecast to remain above target this year, the Bank of England has been gradually cutting rates since the summer of 2024.
Will high inflation stop further interest rate cuts?
The Bank of England chose to keep interest rates at 4% at the most recent Monetary Policy Committee (MPC) meeting on 6 November.
It was narrowly passed by five to four, with governor Andrew Bailey having the deciding vote to hold despite a large faction in the MPC wanting to see rates cut by 25 basis points.
In the previous meeting in September, the MPC held rates at 4%, passing the vote by seven to two.
November’s interest rate decision illustrates how there is a growing dovish impulse in the committee, with more members believing the conditions are right for another rate cut.
Explaining his decision to hold in November, Bailey said there was “value in waiting for further evidence".
The MPC will meet for the final time in 2025 on 18 December, after the Autumn Budget and the release of November’s inflation data.
It means the committee will have much more data to examine and analyse before they make their next decision. With the worst of inflation seemingly behind us, expectations of a Christmas interest rate cut are growing.
Sanjay Raja, chief UK economist at Deutsche Bank said the MPC now has a “clearer path” for a Christmas rate cut.
“With the labour market softening more than expected, GDP growth weaker than the Bank of England projected, and (underlying) inflation tracking a little lower than BoE expectations, we think Governor Bailey – who will likely have the deciding vote for December – will feel more confident about cutting Bank Rate below 4%.”
This view is echoed by Isaac Stell, investment manager at Wealth Club, who said: “Having remained elevated throughout the summer, it looks as if the inflationary descent is starting to gain momentum. The possibility of a pre-Christmas rate cut is now very much on the cards.”
However, the biggest potential roadblock to a rate cut is what chancellor Rachel Reeves will announce in the Autumn Budget and whether the policies set out will push inflation up or down.
Stell continued: “All eyes now turn to the Budget. With the expected fiscal tightening in the form of tax rises a foregone conclusion, policy makers at the BoE will be watching closely to see how these measures affect growth and demand.”
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