UK inflation slows more than forecast, fuelling rate-cut bets

The data come less than a week after BoE governor Andrew Bailey made his latest attempt to push back against market expectations for a pivot towards easing. Mr Bailey said “there is still some way to go” in the fight against inflation last Thursday, after the bank’s Monetary Policy Committee voted to leave rates at a 15-year high for their third-straight meeting.

“The surprisingly low reading in today’s UK CPI figures is questioning last week’s impression after the MPC meeting that the UK might be one of the slow movers when it comes to rate cuts in 2024 and beyond,” said Ulrich Leuchtmann, head of FX research at Commerzbank in Frankfurt.

Good news for PM

The figures give Prime Minister Rishi Sunak a bright spot to focus on as he heads into an election year trailing the opposition Labour Party by about 20 percentage points in public opinion polls. Mr Sunak had begun the year vowing to halve the rate of inflation, which was then running at more than 10 per cent.

“With inflation more than halved we are starting to remove inflationary pressures from the economy,” Chancellor of the Exchequer Jeremy Hunt said. He said budget policies announced last month would help spur growth. “Alongside the business tax cuts announced in the autumn statement, this means we are back on the path to healthy, sustainable growth.”

Underlying measures of prices being watched closely by the BoE for signs of persistent inflation also cooled more than expected. Core inflation – which strips out volatile food and energy costs – eased to 5.1 per cent from 5.7 per cent, while services inflation fell to 6.3 per cent, down from 6.6 per cent. Services prices are being monitored by the BoE for signs that the tight labour market is still fuelling wages and feeding into prices.

“This startling fall in inflation will further reassure people and businesses that there is light at the end of the tunnel in the struggle against eye-watering price rises,” said Suren Thiru, economics director at accountancy trade body the ICAEW. “These inflation numbers suggest that the Bank of England is too pessimistic in its rhetoric over when interest rates could start falling.”

Inflation is still almost double the BoE’s 2 per cent target and higher than the US and the eurozone. “Inflation eased again to its lowest annual rate for over two years, but prices remain substantially above what they were before the invasion of Ukraine,” ONS chief economist Grant Fitzner said on Wednesday.

Food prices rose 9.2 per cent from a year earlier, down from 10.1 per cent in October. Motor vehicle fuel prices were down 10.6 per cent after dropping 2.4 per cent on the month.

Prices of recreational and cultural goods and services were also driving down inflation, sliding 0.4 per cent between October and November. The largest downward contributions came from games, toys and hobbies – particularly computer games – and cultural services, especially admission fees to theatres and live music events.

The fall in producer prices, which often signal costs coming down the pipeline for consumers, was smaller than predicted. Factory gate prices dropped 0.2 per cent compared to a year earlier, below the 0.5 per cent slump predicted by economists. The 2.6 per cent tumble in input costs that producers pay for raw materials and fuel was unchanged from the previous month.

“The most important detail is in the services measure,” Ana Andrade, of Bloomberg Economics, told Bloomberg Television. “This data print definitely increased the chances of an earlier cut.”

Bloomberg