The Bank of England is all but certain to raise interest rates by 0.25 percentage points to 4% on Thursday, after S&P Global's services PMI jumped from 52.1 to 52.8 in October — an eight-month high. The proximate cause of the acceleration is not broad-based prosperity but a narrow surge in business-to-business spending, particularly on AI applications and datacentre-adjacent software services. The high street, meanwhile, continues to deteriorate under compressed consumer confidence. The rate hike comes as CPI climbed from 3.1% in August to 3.5% in September, with services input-price inflation hitting a five-month high. About 40% of services firms reported rising input costs; only 1% reported a decline. The output price balance fell slightly to 56.9 from 57.8, which Pantheon Macroeconomics estimates maps to underlying services inflation of roughly 4.1% — down from the official 4.4% reading but still far above the Bank's comfort zone. The structural story here is a two-speed economy that monetary policy cannot address with a single instrument. AI investment spending is generating genuine activity — enough to end two years of continuous job cuts in the services sector. But this growth is concentrated in IT and professional services, while consumer-facing businesses are being squeezed by the very rate increases meant to cool the broader economy. The blunt tool of interest rates punishes the weak sector to restrain the strong one. Geopolitics complicates the picture further. The Iran war disrupted momentum earlier in the year, and renewed energy and food cost pressures are filtering into input prices across both the UK and eurozone, where inflation rose to a three-year high of 4%. The ECB is now also moving toward a December rate hike. This is a synchronized tightening cycle driven in part by supply-side shocks that rate hikes cannot fix — they can only suppress demand broadly enough that prices eventually stop rising. Financial markets are pricing in three more BoE increases, though most City economists expect inflation to peak in spring and believe only one or two additional hikes will follow. Tim Moore of S&P Global called a November hike "near-certain" and flagged the likelihood of further tightening into 2027. The MPC remains split, with some members prepared to wait for more evidence and others ready to act against even modest price acceleration. The uncomfortable truth is that higher rates will do little to cool AI-driven B2B spending — firms investing in datacentres and software services are not marginal borrowers sensitive to 25-basis-point moves. The cost will fall disproportionately on households, mortgage holders, and consumer-facing businesses already in retreat. Matt Swannell of the Item Club was blunt: "In a two-speed economy, consumer-facing services will come under increasing pressure as households' spending power is squeezed." The eurozone parallel reinforces the pattern. Energy and food costs — external, supply-driven — are pushing inflation higher across Europe, and central banks are responding with demand-side tools. The result is a continent-wide policy that taxes consumers for cost shocks originating in geopolitics and commodity markets, not in excess demand.
