UK inflation rate falls more than expected to 3.9% in November –

On a month-on-month basis, headline CPI fell 0.2%, compared to a consensus forecast of a 0.1% increase.

The core CPI – which excludes volatile food, energy, alcohol and tobacco prices – came in at 5.1% annually, well below the forecast of 5.6%.

According to the Office for National Statistics, the largest downward contributions came from transport, leisure and culture, and food and non-alcoholic drinks.

The Bank of England maintained its hawkish tone last week, leaving its key interest rate unchanged at 5.25%. The Monetary Policy Committee reiterated that policy “will likely need to be restrictive for an extended period.”

The central bank ended a streak of 14 consecutive rate hikes in September as policymakers sought to push inflation back toward the bank’s 2% target from a 41-year high of 11.1% in October 2022.

British Finance Minister Jeremy Hunt welcomed Wednesday’s figures, saying the country was beginning to “relieve inflationary pressures from the economy.”

“Along with the business tax cuts announced in the autumn statement, this means we are back on track for healthy, sustainable growth,” he said in a statement.

“But many families are still struggling with high prices, so we will continue to prioritize measures that address cost of living pressures.”

Significant decline ‘undermines’ Bank of England’s caution

The Bank of England has repeatedly pushed back against market expectations for significant interest rate cuts in 2024, noting last week that “key indicators of ongoing UK inflation remain elevated.”

Suren Thiru, economics director at ICAEW, said Wednesday’s “astonishing” fall in inflation will reassure households that there is a “light at the end of the tunnel”, with softening core CPI numbers showing that underlying underlying price pressure eases.

“The likely pressure on wages from rising unemployment and a stagnant economy should help keep them on a downward trend,” he said by email.

“These inflation figures suggest that the Bank of England is being overly pessimistic in its rhetoric about when interest rates might start to fall. A deteriorating economy could prompt the Bank to begin easing monetary policy by the fall, particularly if inflationary pressures continue to ease.”

A “glimmer of relief”

Richard Carter, head of fixed income research at Quilter Cheviot, said the latest inflation report reinforced a sense of “cautious optimism” in the UK given the cost of living crisis and bond market chaos last year.

Despite the decline in the consumer price index, he noted that the overall economic picture remains “complex, characterized by stagnation and subdued growth prospects.”

Britain’s economy contracted 0.3% month-on-month in October after stagnating in the third quarter.

“This stagnation, with production no higher than in January, paints a picture of an economy struggling to recover from a series of unprecedented challenges,” Carter said by email, acknowledging that the pace was slowing as inflation slows, a “glimmer of relief” for households.

“The pressures are many – from the cost of living crisis, volatile energy markets, Brexit aftershocks to ongoing productivity issues. These factors have overall dampened the economic outlook and consumer confidence.”