27 October 2025: Inflation expectations have risen to their highest level since April

The Bank of England faces a continuing battle to lower the rate of price increases. The British public's expectations for inflation over the next 12 months rose to 4.2% in October, the highest since April, a monthly survey by YouGov for U.S. bank Citi showed on Friday.

Citi said the reading was likely to reinforce the wariness some members of the Bank of England's Monetary Policy Committee feel about cutting interest rates further, even after September inflation came in below the BoE's 4% forecast.

Financial markets raced to price in a nearly 80% chance of a further quarter-point rate cut this year after weak labour market data last week was followed by lower-than-expected headline inflation.

Previously, the next rate cut was not expected until March or April next year, after August's rate cut was approved by only a 5-4 margin due to some policymakers' fears that inflation was becoming too persistent.

"We think inflation expectations remain an important aspect of the monetary policy framework, particularly for those who are cautious about further cuts," Citi economists wrote.

"For those who favour a hold, a further drift in expectations may be at least as significant as an undershoot in actual CPI," they added.

Year-ahead inflation expectations had stayed in a narrow range of 3.9% to 4.0% for the previous five months on Citi's measure.

Long-term inflation expectations also rose to 4.2% in October from 4.1% in September, Citi said.

In a joint letter to the Treasury, executives from nine major supermarkets cautioned that households would “inevitably feel the impact” of any increase in business rates or other levies on the industry.

“Given the costs currently falling on the industry, including from the last Budget, high food inflation is likely to persist into 2026,” the letter stated. “This is not something that we would want to see prolonged by any measure in the Budget.”

The supermarkets’ intervention comes amid speculation that Reeves will unveil new tax measures to plug a £22 billion shortfall in the public finances, following the Office for Budget Responsibility’s downgrade of growth forecasts.

In particular, retailers are concerned about the government’s plans for a “business rates surtax” on large commercial properties, a move expected to hit supermarkets and distribution hubs hardest.

Under the proposed changes, smaller shops and hospitality venues with rateable values below £500,000 will benefit from lower rates. At the same time, large premises above that threshold, including major retail stores and warehouses, will face higher bills.

The British Retail Consortium (BRC), representing the country’s largest grocers, said large stores account for only a small share of retail locations but contribute around one-third of the sector’s total business rates.

The pound fell to its lowest level since August 1st last week as traders reacted to the quadruple threat of falling inflation, a rate cut, lower growth, and the upcoming budget. Volatility was low as investors remained mainly on the sidelines amid contrary comments from rate-setters.

It reached a low of 1.3287 and closed at 1.3303.

America’s economy has started to look eerily familiar. Rising corporate greed, deepening inequality, and a dangerous return to protectionist tariffs are reviving the same patterns that led to the Great Depression nearly a century ago. History rhymes, it doesn’t repeat. The structural symptoms are back, but the tools, systems, and safeguards are very different.

There is still a “get rich quick” element to investors' behaviour, as they have become accustomed to making double-digit profits on every trade but do not see, or, in many cases, understand, the risks they are taking.

In the late 1920s, the top 10% of Americans held roughly 84% of household wealth. The “Roaring Twenties” masked a fragile reality, an economy running on speculation, easy credit, and massive inequality.

Sound familiar?

Nearly a century later, the numbers look disturbingly similar. The top 0.1% now control over 20% of all U.S. wealth, close to the ratios seen in 1929. Corporate profits have soared to record highs, while wages stagnate. Between 2020 and 2021 alone, more than half of the total price increases were driven by profit markups, not labour or supply costs. Nothing has substantially changed since.

CEOs are pocketing over 600 times what their median workers earn, a ratio unseen since before the crash. This imbalance creates the same structural brittleness that made the 1930s collapse inevitable: when profits pile up at the top, consumer demand at the bottom dries up, and the entire system wobbles.

The top-heavy nature of the economy is being actively encouraged by the current Administration. Trump comes from a background where deals are made solely for profit, with no regard for the industry's underlying effects.

The President wants manufacturing output to return to the U.S. by making goods and services imported from overseas more expensive.

This entire policy is flawed, and many manufacturers are considering how to push back against the tariffs imposed.

Economies thrive when middle-class spending power drives growth. When inequality becomes extreme, financial crashes become more likely because too much capital becomes trapped in speculation rather than circulation.

Despite the grim parallels, today’s economy isn’t doomed to collapse like the 1930s. The systems, safety nets, and policy tools are stronger, for now.

Modern Central Banking can inject liquidity at lightning speed. Deposit insurance protects consumers from the mass bank runs that destroyed confidence in the early 1930s. Social programs, global trade networks, and digital markets create a level of resilience that simply didn’t exist in the Great Depression era.

But resilience isn’t immunity. The combination of greed, inequality, and trade warfare can still trigger a crisis, especially if political dysfunction prevents timely intervention.

The Federal Government remains in shutdown, and hence, we continue to have very little data on the state of the economy. Nevertheless, there is a widespread expectation that the Fed will deliver a rate cut this week. In the absence of new information, the Fed will emphasise the weak job growth in August, which has not been contradicted by similar indicators.

Despite the dire forecasts, the dollar index continues to attract buyers, though there is a distinct note of caution as traders shy away from any rumoured sell orders.

Last week, the dollar index rose cautiously to a high of 99.14. However, rumours of sellers around the 99.20 level saw it retreat marginally, closing at 98.94.

The eurozone's overall headline budget deficit is set to rise for the first time since 2020 this year, reflecting moves by many countries in the area to ease fiscal restraints to fund infrastructure improvements and defence spending.

In a note to investors, UBS estimated that, based on aggregated draft budgets, the eurozone budget shortfall is tipped to grow to 3.3% of gross domestic product in 2025, up from 3.1% of GDP last year.

The figure is seen edging up further to 3.7% in 2026.

Fiscal stimulus in the form of higher defence spending across the European Union and higher infrastructure spending in Germany is likely to be the key theme for the European macro outlook over the next two years. The pressure President Trump is exerting on NATO members to “pay their share” has had an effect, as he could easily make good on his threat to withdraw from the group.

Spurred on by Russia’s invasion of Ukraine, several European countries have outlined plans to increase their defence expenditures.

This includes Germany, the region’s largest economy, which recently scrapped longstanding constraints on borrowing to help pay for a massive 500-billion euro spending plan backed by Chancellor Friedrich Merz.

A budget put forward by Berlin shows a "marked increase" in the country’s headline deficit from 3.25% of GDP this year to 4.75% in 2026.

France, Europe’s second-biggest economy, is also seen lifting its defence budget by 3.5 billion euros next year, leaving Paris with an overall fiscal shortfall that is on pace to climb from 5.4% of GDP this year to 5.8% of GDP, according to IMF figures.

Notably, France, which has been mired in weeks of political turmoil, has yet to unveil a draft budget. There is a distinct “let them eat cake” feeling in France as the country has similar issues to the U.S. regarding wealth distribution, with many trade unions calling for the Government to introduce a wealth tax.

European Central Bank Governing Council member José Luis Escrivá said he is satisfied with the present settings for borrowing costs. “What the ECB is communicating in its statements after each meeting, and we’ll have one soon, is that as inflation is truly at the target, which is 2%, we think it’s a good time to look ahead and consider the current level of interest rates appropriate,”

The ECB’s next rate decision is scheduled for October 30, with policymakers widely expected to maintain the deposit rate at 2%, where it has been since June. With inflation now comfortably at the ECB’s 2% target, markets and economists also don’t expect another move at their final gathering of the year in December either.

Turning to his home country, Escrivá said, “Not only is growth very high, but the positive growth gap with Europe is at unprecedented levels,” the Bank of Spain governor said. “And this is, if anything, even more surprising or noteworthy, because the Spanish economy has only become more economically integrated with the rest of Europe.”

Spain is set to publish new output numbers on Wednesday, which are predicted to show the economy grew 0.6% in the three months through September. That compares with an expansion of just 0.1% in the eurozone, where data is due on Thursday.

The euro is not attracting many buyers at the moment, and there is little interest from speculators in taking short positions either. Last week, it traded between 1.1675 and 1.1576, closing at 1.2628.

Have a great day!