Sharp Inflation Slowdown Opens Door to Bank of England Interest Rate Cut
The Office for National Statistics (ONS) reported that headline inflation fell to 3.2% in the latest month, down from 3.6% in October. This decline supports growing expectations of a Bank of England (BoE) interest rate cut from 4% to 3.75%, which would be the lowest level in almost three years.
The drop in inflation was largely driven by falling food costs, including price decreases for cakes, biscuits, and breakfast cereals. Additionally, tobacco prices eased and women's clothing prices fell, influenced by a supermarket price war ahead of the Christmas season. Factory-gate price pressures also cooled as lower food inflation slowed the cost of goods leaving factories, although the annual cost of raw materials for businesses continued to rise.
Labour market weakness remains a factor, with unemployment rising to 5.1% since the Labour Party took office. This contributed to the inflation slowdown through weaker wage dynamics.
More than 90% of financial market participants, according to London Stock Exchange Group data, expect the BoE to cut rates to 3.75%.
Separate ONS data indicated the UK economy contracted for two consecutive months ahead of Chancellor Rachel Reeves's second budget. In her budget, Chancellor Reeves cited measures such as frozen rail fares and prescription fees, along with a £150 cut to average energy bills, designed to help lower prices. The BoE is anticipated to see inflation fall more rapidly next year as a result of these measures.
