UK inflation as measured by the Consumer Prices Index (CPI) undershot market forecasts to remain at 3% in October, the Office for National Statistics reported on Tuesday.
Sterling was hit - down 0.6% against the euro - as inflation came in lower than analysts' forecasts of a year-on-year rise of 3.1%, with traders re-evaluating what this could mean in terms of the Bank of England's already dovish outlook for further interest rate rises.
The Bank of England (BoE) had previously warned the inflation rate could hit 3.2% this autumn, before falling back. But as inflation did not rise above a five-year high of 3%, BoE governor Mark Carney narrowly avoided being forced to write a letter to Chancellor Philip Hammond explaining why it was so far above the Bank's target of 2%.
The inflation rate for food and non-alcoholic beverages was the highest out of all sectors in October, continuing to increase to 4.1%; the largest figure since September 2013.
Meanwhile, the biggest downward impacts came from falling prices for motor fuel, housing and household goods.
Commenting on the figures, Ed Smith, head of asset allocation research at Rathbones, said: "While the Governor of the Bank of England gets off on a technicality this time - 3.0008% doesn't count as breaching 3%! - we believe that peak inflation is close.
"Indeed, our analysis suggests domestically generated inflation may have peaked as early as the first quarter of this year. And if it weren't for British Gas pushing up their prices and the recent increase in the sterling price of oil, headline consumer price inflation could have peaked earlier than November too.
"There may be concern about this especially with wage growth lagging, but investors and consumers need not worry too much."
Aberdeen Standard Investments senior economist Paul Diggle also argued UK inflation has probably not yet peaked and has a few more months to run.
He said: "This continued rise in inflation is going to keep real wage growth negative and hurt consumer spending.
"Given that consumption has been the bedrock of the UK economy since the referendum, that doesn't bode particularly well for growth."
Diggle added that the BoE is "stuck between a rock and a hard place", with inflation "well above target", but "Brexit uncertainty lingers and consumer spending growth could weaken".
"On balance, we think the Bank of England will have to hike interest rates at least once more next year," he said.
Meanwhile, Paul Flood, lead manager of the Newton Multi-Asset Diversified Return and Multi-Asset Income funds, agreed the average consumer will be further impacted.
He said: "You cannot escape the fact that interest rates are at 0.5% and inflation is at 3%, so savers with cash in the bank are going to have to start going into their savings."
However, Flood disagreed with the BoE's prediction that wage growth is likely to fall, with new figures set to be released tomorrow.
"Unemployment is fairly low now so I would expect to see some wage inflation coming though," he said.
"This is the one part that has been missing in this cycle. There is real pressure on the income levels we see today."
However, Flood added today's inflation figures could give the Chancellor more to work with, as he prepares to unveil his Autumn Budget next week.
"Overall, the bond market does not seem to be pricing in significant inflationary pressures," he said. "The bond market where it is today gives Hammond some room to manoeuvre in terms of having a greater deficit, given where interest rates are.
"With rates as low as they are, in terms of the yield curve it allows him to run a higher deficit for a longer duration without significantly impacting the size of that deficit. That greater spending can help support the economy going through the Brexit process."
Meanwhile, analysts at AJ Bell noted "it does seem that a sustained drop in the value of the pound can lead to inflation, while strength can help dampen it down".
It added that that BoE may raise interest rates more quickly than the markets currently anticipate "to make sterling a more attractive proposition relative to say the dollar, yen, or euro".
"A 12-month LIBOR rate of 0.77% suggests that investors are currently factoring in just one more quarter-point borrowing cost hike by this time next year.
Ian Kernohan, economist at Royal London Asset Management, added: "With producer price inflation already easing, we think the impact of sterling devaluation is close to its peak and CPI should fall next year, reducing the squeeze on real household incomes."
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