After UK inflation fell for the first time in seven months, wealth managers discuss the impact on the economy, asset allocation and the timing of a potential interest rate cut.

The UK inflation rate dropped to 3.6 per cent in October from 3.8 per cent in the previous month, according to figures from the UK’s Office for National Statistics. The fall is slightly less than economists had expected at 3.5 per cent, affected by energy prices rising at a slower rate.

Food price inflation increased, with prices on average 4.9 per cent higher than they were in October last year. Ahead of next week’s Autumn Budget, where tax hikes are expected, UK Chancellor of the Exchequer Rachel Reeves said there is more to do to ease the cost of living, with inflation above the Bank of England's 2 per cent target.

Meanwhile, European Union annual inflation fell to 2.5 per cent in October, down from 2.6 per cent in September, close to the 2 per cent target, figures by Eurostat, the statistical office of the EU, showed yesterday.

The UK’s underlying rate of inflation, as measured by the annual core consumer price index (CPI) rate – excluding food, energy, alcohol, and tobacco – was also down to 3.4 per cent, as expected, compared with 3.5 per cent in September.

Speculation is rising about a potential interest rate cut in December, after the Bank of England Monetary Policy Committee (MPC) voted in November to hold interest rates at 4 per cent, as expected, marking a second consecutive hold since the base rate was reduced to 4 per cent in August.

Here are some reactions from wealth managers to the latest UK inflation figures.

Daniel Casali, chief investment strategist at wealth manager Evelyn Partners
“The latest inflation reading signals that restrictive monetary policy is working. Importantly, service producer price inflation (a leading indicator for consumer services inflation) has also started to trend lower, suggesting further disinflation ahead in labour-intensive sectors. This improvement in the underlying inflation picture strengthens the case for rate cuts, though the Bank of England’s Monetary Policy Committee (MPC) remains cautious. February remains the base case for a rate cut, with December only possible if further data surprises materialise on the downside.

"At the same time, labour market conditions are weakening. Unemployment has climbed to 5 per cent, its highest level in three years, and job vacancy rates are steadily declining. Adding to this disinflationary backdrop, the upcoming Budget will include higher taxes, which will reduce household disposable income and dampen demand. This fiscal tightening complements monetary restraint, accelerating the path towards the Bank’s 2 per cent inflation target. In short, this makes it harder for the MPC to justify holding rates at current restrictive levels deep into 2026. Shorter maturity gilts should benefit from lower base rates.”

Lale Akoner, global market analyst at eToro
"The slowdown, which is driven by softer energy bills and easing services inflation, raises expectations that the Bank of England could deliver a pre-Christmas rate cut. While inflation remains above target, momentum is clearly cooling as wage growth softens, and the jobs market weakens. A credible budget next week that reins in inflation without stifling growth could anchor market confidence and pave the way for gradual monetary easing. For retail investors, this backdrop favours high-quality bonds and dividend-paying equities, which stand to benefit from lower yields. Real assets like infrastructure may also regain appeal as policy shifts. The prudent stance: stay diversified, favour income and quality, and avoid overreacting to short-term fiscal noise.”

Neil Wilson, investor strategist at Saxo UK 
"It is likely that inflation has peaked and this ought to provide ample cover for the Bank of England to press on with rate cuts come December. Given the expected fiscal tightening, which will deliver a contractionary impulse to the economy, the Bank should be leaning towards more cuts. Weakness in the labour market and the broader economy is likely to worsen, at least in the near term. However, the MPC will be mindful about potential inflation-inducing tax hikes from the Chancellor now that the broad-based income tax hike seems to no longer be an option. For sterling, it's a damp outlook as it faces a currency-toxic mix of fiscal tightening, economic backsliding and monetary loosening."

Andrew Wishart, senior UK economist at Berenberg 
“Although inflation is finally coming down it remains well above the 2 per cent target. Large price rises in the areas most acutely affected by the sharp increase in labour costs this year show that the BoE must be wary of prolonging high inflation by cutting interest rates too far too quickly. We doubt that a cut in December would signal a rapid further reduction in interest rates ahead. We bring forward the next 25 basis point cut in our policy rate forecast to 17 December. Previously we thought the BoE would delay it until February 2026. Our central forecast is that the BoE reduces interest rates once more in Q1 2026 to 3.5 per cent."

Brad Holland, director of investment strategy at JP Morgan Personal Investing
“While Governor Andrew Bailey has been at pains to say that one good inflation reading is not enough to convince policymakers that inflation is reliably on the way back down, two might just be enough. With the latest data following lacklustre growth figures out last week, the calls that action is needed are getting louder by the day. Markets are pricing in an 80 per cent chance of a 0.25 per cent interest rate cut in December, and the data is suggesting that the time has probably come.”

John Wyn-Evans, head of market analysis at Rathbones
The fall in headline inflation from 3.8 per cent to 3.6 per cent in September was a little smaller than implied by the consensus forecast of 3.5 per cent but directionally positive. However, the government's latest U-turn on tax increases planned in the Budget means that we are not yet out of the woods. By abandoning the idea of raising income taxes, the Chancellor could still be more dependent upon raising levies that increase inflation, such as taxes on any sort of consumption. Thus, we would expect the Bank of England to reserve judgement until it has seen the contents of the red briefcase. Even so, market-based expectations for the 18 December meeting of the Monetary Policy Committee have seen the probability of a quarter-point cut rise from around 20 per cent a month ago to 86 per cent. The level of the pound [sterling] remains the best barometer of sentiment. It initially sold off a little on the news but has since returned to where it started the day, suggesting that investors see little in the release to change policymakers' current thinking. All eyes will now be on the Chancellor’s Budget next week, as markets and policymakers await signals on the UK’s economic direction."

Julian Jessop, economics fellow at the free-market think tank the Institute of Economic Affairs
"Inflation is heading in the right direction again, but it is far too soon to sound the all clear. The breakdown of the latest data also shows that UK inflation is still sticky. The fall in inflation was at least in line with the Bank of England’s forecasts, removing one barrier to an interest rate cut next month. However, the main reason why interest rates are likely to fall further is the weakness of economic activity, which is likely to be compounded by the announcement of even more tax increases next Wednesday."