UK inflation fell more than expected to 3.9% in November

On a monthly basis, the headline CPI fell by 0.2%, compared to expectations for a rise of 0.1%.

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

The ONS said the biggest downward contributions came from transport, leisure and culture, food and non-alcoholic drinks.

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

The central bank ended a string of 14 consecutive interest rate increases in September, as policymakers look to fight inflation back towards the bank’s target of 2% from a 41-year high of 11.1% in October 2022.

British Finance Minister Jeremy Hunt welcomed Wednesday’s figures and said that the country “has begun to remove inflationary pressures from the economy.”

“Combined with the business tax cuts announced in the Autumn Statement, this means we are back on the path to healthy and sustainable growth,” he said in a statement.

“But many households are still struggling with rising prices, so we will continue to prioritize measures that help overcome cost-of-living pressures.”

The significant decline “undermines” the Bank of England’s caution

The Bank of England has repeatedly pushed back on market expectations for deep interest rate cuts in 2024, noting last week that “key indicators of continued UK inflation remain high.”

Suren Thero, director of economics at the Institute of Chartered Accountants ICAEW, said the “astonishing” drop in inflation recorded on Wednesday would reassure households that there was a “light at the end of the tunnel”, with falling core CPI figures showing that underlying price pressures are easing.

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“Potential pressure on wages due to rising unemployment and economic recession would help continue to keep wages on a downward trajectory,” he said via email.

“These inflation figures suggest that the Bank of England is too pessimistic in its rhetoric about when interest rates could start to fall. The deteriorating economy may prompt the Bank to start easing policy by the autumn, especially if inflationary pressures continue to ease.”

“A ray of comfort”

Richard Carter, head of fixed interest research at Quilter Cheviot, said the latest inflation reading adds to a sense of “cautious optimism” in the UK regarding the cost of living crisis and last year’s bond market chaos.

Despite the decline in the CPI, he noted that the broader economic picture remains “complex, marred by recession and weak growth prospects.”

The British economy contracted by 0.3% on a monthly basis in October, after stabilizing in the third quarter.

“This recession, which has left output no higher than it was in January, paints a picture of an economy struggling to recover from a series of unprecedented challenges,” Carter said via email, while acknowledging that the pace of slowing inflation presents a good opportunity. “A ray of comfort” for families.

“The pressures are manifold – from the cost of living crisis, volatile energy markets, and the aftershocks of Brexit, to ongoing productivity issues. Combined, these factors have weakened economic prospects and consumer confidence.”

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