UK inflation slipped to 3.6% in October 2025 — the lowest in four months — but the Bank of England isn’t celebrating. With four of its nine policymakers already voting to cut interest rates, the central bank now faces a painful choice: act on signs of cooling prices, or hold firm against stubborn wage and service cost pressures. The Office for National Statistics released the data on November 19, 2025, confirming what markets had expected — yet the underlying story is far more complicated than the headline number suggests.
Energy Prices Drop, But Services Stay Sticky
The drop in inflation was largely driven by energy. Gas prices climbed just 2.1% year-over-year in October, down from a staggering 13% in September. Electricity followed suit, rising only 2.7% instead of 8%. That’s thanks to the Office of Gas and Electricity Markets lowering its price cap in October, a move that saved the average household over £200 annually. It’s the kind of policy shift that feels like relief — until you realize it’s a one-off. The real inflation problem isn’t energy anymore. It’s services.Core CPIH, which strips out volatile food, energy, and alcohol prices, fell to 3.7% — its lowest since November 2021. But services inflation, which includes haircuts, gym memberships, and legal fees, still rose 4.5%. That’s the part the Bank of England can’t ignore. As their November Monetary Policy Report noted, “Much of the remaining 1 percentage point of the overshoot... reflects elevated labour cost growth.” In plain terms: workers are still getting raises, and businesses are passing those costs on. It’s not a surge. It’s a slow drip.
Who Voted to Cut Rates — And Why
The Bank of England’s Monetary Policy Committee revealed a surprising split: four members pushed for a 0.25% rate cut to 3.75%. That’s a significant signal. These policymakers aren’t reckless. They’ve watched inflation fall from 11.1% in October 2022. They know the pain of the cost-of-living crisis — 56% of households were still reporting rising expenses in December 2024, even as the worst passed.“CPI inflation is judged to have peaked,” the report stated. And they’re right. But the other five members held back. Why? Because they see the same data: food and tobacco prices are still adding 0.4 percentage points to inflation. And wage growth, though slowing, remains above pre-pandemic norms. One insider told Bloomberg: “We’re not chasing a number. We’re chasing stability. One wrong move, and you restart the cycle.”
The Long Shadow of Double-Digit Inflation
It’s easy to forget how bad it was. Between September 2022 and March 2023, the UK had seven straight months of double-digit inflation. The energy price cap — the government’s safety net — jumped from £1,277 per year in 2021 to £3,549 in October 2022. Millions cut back on heating, skipped meals, or worked extra shifts. Three years later, consumer prices are over 20% higher than they were in 2022. That’s not just a statistic. That’s a generation of habits changed. People still check the fridge before turning on the oven. They buy store brands. They delay car repairs.Even now, some sectors are deflating. Furniture prices fell 0.3%, transport costs dropped 0.6%. But communications? Up 6.1%. That’s streaming subscriptions, mobile plans, broadband — the things you can’t live without. And they’re still rising. That’s the new normal.
What’s Next? The March 2026 Target
The Bank of England projects inflation will fall to 3.2% by March 2026. That’s close to their 2% target — but not quite there. And here’s the twist: they expect services inflation to drop to 4.3% by then. Still high. Still a drag. If wage growth doesn’t slow further — and if the public sector pay deals announced in late 2025 hold — that 4.3% could stick around much longer.Markets are pricing in one more rate cut by February 2026. But the Bank of England won’t move unless they’re certain. They’ve been burned before. In 2023, they cut too early — then had to hike again. They won’t make that mistake twice.
Why This Matters to Every Household
Lower inflation doesn’t mean lower bills. It means bills aren’t rising as fast. Your mortgage payment won’t drop if rates stay at 3.75%. Your rent? Probably not. But if the Bank cuts again, it could mean cheaper loans for cars, home improvements, or small business credit. For families, it’s the difference between cutting back and breathing a little easier. The Bank isn’t just setting rates — it’s deciding whether the UK economy gets a gentle landing or a bumpy one.Frequently Asked Questions
Why did inflation fall so sharply in October 2025?
The sharp drop was primarily due to the Office of Gas and Electricity Markets lowering its energy price cap in October, which caused gas and electricity inflation to plummet from 13% and 8% to just 2.1% and 2.7% respectively. This one-time policy adjustment removed a major inflation driver, but it doesn’t reflect broader economic improvement.
Why are some Bank of England members pushing for a rate cut while others are holding back?
Four members believe inflation has peaked and that cutting rates now will support growth without reigniting price pressures. The other five worry that services inflation (4.5%) and wage growth remain too high, and that cutting too soon could force another round of hikes later — a mistake the Bank made in 2023. They’re prioritizing long-term stability over short-term relief.
How does this affect mortgage holders and savers?
If the Bank cuts rates to 3.75%, variable-rate mortgage holders could see small reductions in monthly payments by early 2026. Savers, however, won’t benefit much — deposit rates remain low as banks balance risk. Fixed-rate mortgages are unaffected until renewal. The real win is for new borrowers: lower rates mean cheaper loans for homes, cars, and businesses.
Is the UK out of the woods with inflation?
Not yet. While headline inflation is cooling, underlying pressures — especially in services and wages — remain. Food prices are still adding 0.4 percentage points to inflation. And with the cost of living still 20% higher than 2022, many households are financially fragile. A single shock — like a new energy price cap hike or a wage spike — could push inflation back up.
What’s the Bank of England’s target, and are they likely to reach it?
The Bank’s official target is 2% inflation. They now project inflation will reach 3.2% by March 2026 — close, but not there. Achieving 2% likely requires sustained wage moderation and lower services inflation. Most economists believe it won’t happen before late 2026 or early 2027, unless productivity improves dramatically.
How does this compare to inflation in other G7 countries?
The UK’s 3.6% is higher than Germany (2.1%) and Canada (2.5%) but lower than the US (3.9%) and Japan (3.8%). The UK’s challenge is unique: it has higher services inflation than most peers, largely due to persistent wage pressures in healthcare, education, and hospitality — sectors that are harder to automate and more reliant on domestic labor.
