UK Inflation Falls to 3.2%, Boosting Expectations of Early Bank of England Rate Cut
UK annual inflation decreased to 3.2% in the latest month, down from 3.6% in October, increasing the likelihood of an early Bank of England (BoE) rate cut. Following the inflation drop, the BoE's Monetary Policy Committee (MPC), consisting of nine members, is expected to reduce the Bank Rate by 0.25 percentage points from 4.0% at the December decision. Market odds for this cut exceeded 98% after the inflation data was released.
Food price inflation slowed to 4.2%, down from 4.9%, with month-on-month price declines in sugar (-4%) and pasta/couscous (-4.2%). Annual services inflation remained elevated at 4.4%, slightly lower than October's 4.5%. The MPC had previously been concerned about a persistent inflation hump driven by wage growth. The committee had cut rates in February, May, and August before pausing in November.
The current economic context includes Reeves' budget measures such as energy bill reductions set for next spring and a £25 billion increase in the employer National Insurance Contributions levy. Some of these costs have been passed on to consumers, and employers have been cutting back on hiring.
Independent MPC member Swati Dhingra has argued that the inflation pressures are largely temporary and cautioned against excessive caution when considering rate cuts.
