To The Moon

Driven by a sharp rise in motor fuel prices, the UK's 12-month inflation rate through September came in higher than expected at 3.5%. Economists had unanimously forecast 3.4%. The September reading extends the upward trend in UK inflation: 2.9% in July, 3.1% in August, with the September figure marking the highest year-on-year reading over the past twelve months.

The Office for National Statistics said on Wednesday that motor fuel inflation hit its highest level since August 2022 — a period when fuel prices surged following the outbreak of the full-scale Russia-Ukraine conflict. As a net energy importer, the UK is highly vulnerable to external energy shocks, such as a US-Iran conflict or disruptions to oil shipments through the Strait of Hormuz. ONS data on Wednesday showed that UK motor fuel prices surged 29.8% year-on-year through September. Following the data release, the pound was roughly flat against both the euro and the dollar, while UK gilt yields also saw little change.

Scott Gardner, investment strategist at J.P. Morgan Personal Investing, wrote in a Wednesday morning note that the recent rebound in headline inflation "has erased the disinflation progress made in the spring." "Bank of England policymakers will not focus solely on the headline inflation reading," he said. "In particular, services inflation has been accelerating in recent months, which will raise concerns that second-round inflation effects have emerged beyond energy price increases. While the challenges today differ from those in 2021, ongoing conflicts are weighing on the UK economy, and the case for raising rates has grown stronger."

According to the data: market pricing puts the probability of the Bank of England raising rates by 25 basis points to 4% next month at 98%; most traders also bet that the central bank will hike by another 25 basis points at its final meeting of the year in December.