Hopes of rate cuts in 2024 mount after bigger-than-forecast drop in inflation
The Office for National Statistics said the Consumer Prices Index eased back to 3.9% in November, down from 4.6% in October.
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Your support makes all the difference.Inflation dropped back unexpectedly sharply to its lowest level for over two years last month, reinforcing forecasts for the Bank of England to start cutting interest rates early in 2024.
Official figures showed falling fuel prices and another drop in food inflation drove the Consumer Prices Index (CPI) down to 3.9% in November from 4.6% in October, and the lowest level since September 2021.
It was a far bigger fall than forecast, with most economists expecting inflation to have eased back to 4.3% last month.
The pound dropped after the figures from the Office for National Statistics (ONS), down 0.6% at 1.27 US dollars and 0.3% lower at 1.15 euros, as the steep decline was seen bolstering the case for policymakers at the Bank to begin bringing rates down in the first half of next year.
It marks another dramatic decline after inflation dropped from 6.7% in September to 4.6% in October, which led to Prime Minister Rishi Sunak last month declaring an early victory in his goal to halve inflation by the year end.
Mr Sunak said on Wednesday the latest fall in CPI was “good news for everyone in this country”.
But the Bank has been quick to warn recently that the job of bringing inflation back to its 2% target is far from done and has poured cold water on speculation over an imminent interest rate cut.
It held rates at 5.25% last week, while three of the nine-strong Monetary Policy Committee (MPC) voted for a rise to 5.5%.
The ONS confirmed that the Bank had not seen the most recent inflation figures before its latest decision.
Experts said the Bank will come under pressure to start reining in its messaging on rates.
Martin Beck, chief economic adviser to the EY Item Club, said the scale of the latest drop in inflation “calls into question the justification of the MPC’s high for longer rhetoric around interest rates”.
He is pencilling in rate cuts to begin from next spring.
Samuel Tombs, at Pantheon Macroeconomics, added: “November’s surprisingly sharp fall in CPI inflation reinforces the likelihood that the MPC will begin to reduce Bank Rate in the first half of 2024, far earlier than it has been prepared to signal so far.”
He is forecasting the headline rate of CPI inflation to reach the Bank’s target of 2% in the second quarter of next year.
The Bank forecast last month it would take another two years to come back to target.
Chancellor Jeremy Hunt claimed the UK was “back on the path to healthy, sustainable growth” after the big fall in inflation.
He said: “With inflation more than halved, we are starting to remove inflationary pressures from the economy.
“Alongside the business tax cuts announced in the autumn statement, this means we are back on the path to healthy, sustainable growth.”
Grant Fitzner, chief economist at the ONS, said while inflation is now at a two-year low, “prices remain substantially above what they were before the invasion of Ukraine”.
The ONS data showed that falling prices at the fuel pumps helped bring down the rate of inflation last month, with the average cost of petrol dropping by 4.1p a litre between October and December, to stand at 151p last month.
CPI was also pulled lower by another slowdown in the pace of annual food price inflation, which dropped to 9.2% last month, down from 10.1% in October, and the lowest rate since May last year.
The latest data also showed a decline in the CPI measure of inflation including housing costs (CPIH) to 4.2% in November, down from 4.7% in October, while the Retail Prices Index (RPI) fell back to 5.3% from 6.1%.