UK inflation fell to an eight-month low in November, declining more sharply than anticipated, with traders now viewing a Bank of England (BoE) rate cut on Thursday as nearly certain. The Office for National Statistics reported that the Consumer Price Index (CPI) rose 3.2% year-on-year last month, down from October's 3.6%, driven partly by lower prices for items like cakes, biscuits, and breakfast cereals. The figure undershot economists' forecast of 3.5% and the BoE's projection of 3.4%.
Core CPI, excluding volatile items, also increased by 3.2% annually, below the previous and expected 3.4%. Services inflation—a key domestic gauge—rose 4.4%, slightly better than the central bank's 4.5% estimate. Following the release, the pound fell 0.7% against the dollar to 1.3322 as investors priced in lower borrowing costs, with markets now fully expecting two rate cuts by April next year.
Paul Dales, Chief UK Economist at Capital Economics, noted that inflation is "falling much faster than anyone anticipated," adding that the cooling "should be enough for the BoE Governor to pull out his 'big bazooka' tomorrow and deliver an early Christmas present to borrowers—a rate cut." The data provides the BoE with updated insights into inflationary pressures ahead of its policy decision.
Governor Andrew Bailey is expected to cast the deciding vote this week, with the Monetary Policy Committee (MPC) currently split evenly between hawks and doves. Despite holding rates steady in September and November, signs of easing inflation and economic slowdown have emerged since the last meeting. Recent data showed unemployment climbing to 5.1% in the three months to October—a five-year high—while private-sector wage growth dipped below 4% for the first time since 2020.
Additional indicators revealed slowing services growth, the sharpest job contraction since February, and the first drop in new orders in four months. Some businesses cited uncertainty around Chancellor Rachel Reeves' upcoming Autumn Budget as a reason for delaying investments, with weak consumer and business confidence further dampening growth. Youth unemployment also hit 13.4%, the highest in over a year.
Reeves welcomed the CPI decline, emphasizing that her budget measures—including frozen rail fares, reduced energy bills, and fuel tax relief—aim to ease living costs. Preliminary BoE analysis suggests these policies could lower annual inflation by up to 0.5 percentage points by spring.
Looking ahead, while underlying cost pressures may persist, annual CPI could retreat rapidly by 2026. Factory gate prices rose 3.4% in the year to November, easing from October's 2.5-year peak of 3.6%, though input costs continued climbing, with fuel and raw materials up 1.1% annually—the fastest pace in 12 months.
Bailey, who sided with MPC hawks in November, may now align with doves given mounting evidence of economic strain. Price pressures eased across most categories except communications, with food inflation slowing to 4% and alcohol/tobacco inflation dropping to 4%. Clothing and footwear prices fell 0.6% annually amid Black Friday discounts.
RSM UK's Thomas Pugh cautioned that December inflation might rebound slightly due to tobacco tax hikes and fading discount effects, but today's sharp decline "opens the door for further rate cuts early next year, especially if labor market weakness persists."
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