UK tipped for speedier rate cut after surprise inflation fall

A surprise fall in inflation in November has raised hopes that the Bank of England will begin cutting interest rates sooner than expected.

Inflation – the rate prices rise at – fell from 4.6% to 3.9% last month, the lowest for more than two years.

The Bank has repeatedly increased rates to try to control inflation, driving up mortgage repayments for millions.

But some economists think it may start cutting them in the first half of 2024, much earlier than previously forecast.

The Office for National Statistics (ONS) said that falling petrol prices were largely behind the surprise drop in inflation last month.

Slowing prices for food and household goods also contributed.

But while inflation is well down from its peak in 2022, it is still almost double the Bank of England’s 2% target, and many households will not feel better off as energy bills and borrowing costs remain high.

“It remains vital no one forgets that whilst inflation is falling it doesn’t mean prices are falling, and that not everyone has had an inflation busting wage increase over the past couple of years,” said Danni Hewson, head of financial analysis at AJ Bell.

“Some families will be dreading this Christmas, feeling guilty about the presents they’ve been able to afford or worried about paying off debts they’ve racked up just to afford the basic festive treats,” she added.

Petrol and diesel prices hit record levels in 2022, after Russia invaded Ukraine and global oil prices surged.

But pump prices have fallen back and are now at their lowest level for more than two years. A litre of unleaded costs about £1.43 on average, a price last seen at UK forecourts in October 2021.

Meanwhile, the prices of a variety of baked goods, including white and wholemeal sliced bread, along with packs of cakes fell between October and November after rising a year ago.

Milk, cheese and egg prices rises also slowed, but olive oil, sugar and onion costs remain much higher, meaning food prices are still 9.2% more expensive than this time in 2022 .

The last time inflation in the UK was lower than 3.9% was in September 2021 when it was 3.1%. Most economists had expected UK inflation to fall to 4.3% last month.

But while the cost of living crisis may be starting to ease, many households and businesses remain under pressure.

Chef Seema Dalvi, at Dalvee restaurant in Poulton, Lancashire told the BBC that while price rises were slowing down “inflation is definitely killing us”.

She used to order all her ingredients from one supplier but now shops around for the best deals.

But it is not just higher food prices Ms Dalvi has to contend with. “Energy prices, rents, business rates, ingredient prices, alcohol prices, staff salaries, it’s a lot,” she said.

Despite gas and electricity prices being lower than last year, most households will actually pay more for energy this winter than in 2022 because government support for bills is no longer in place.

The Bank of England has also put up interest rates 14 times since December 2021 to try to slow price rises. Rates are now 5.25%, a 15-year high, leading to higher borrowing costs for mortgages but also higher savings rates.

Last week the Bank’s governor, Andrew Bailey, ruled out cutting rates anytime soon, despite weakening economic growth.

However, on Wednesday Martin Beck, chief economic adviser to the EY Item Club, said the Bank would now find it harder to justify its “high for longer rhetoric around interest rates”.

Samuel Tombs, at Pantheon Macroeconomics, added: “November’s surprisingly sharp fall in CPI inflation reinforces the likelihood that the [Bank’s] Monetary Policy Committee will begin to reduce the Bank Rate in the first half of 2024, far earlier than it has been prepared to signal so far.”

UK inflation remains higher than in other countries including the US and Germany but the gap is narrowing.

The fall to 3.9% in November puts the UK on level footing with France, but ahead of the EU’s average rate of 3.1% and the US’s 2.1%.

Chancellor Jeremy Hunt said the latest inflation figures set the UK “back on the path to healthy, sustainable [economic] growth”, but that the government would “continue to prioritise measures that help with cost of living pressures”.

But Rachel Reeves, Labour’s shadow chancellor, said “prices are still going up in the shops, household bills are rising and more than a million people face higher mortgage payments next year after the Conservatives crashed the economy”.

Additional reporting by Priya Patel, economics producer

Nick Eardley, BBC Verify correspondent

When inflation was starting to go up and up – the Government blamed global challenges. They had a point.

A big part of the cause of inflation was soaring energy prices. But now they’ve come down – that’s helped push inflation down.

The impact of energy on the inflation figures is quite stark.

If you look at inflation this time last year, with energy stripped out of the figures, it would have been a lot lower at 7.4% (it was 10.7%). The price of energy was driving inflation UP.

The opposite is happening now.

The falling price of energy is bringing the UK’s inflation rate DOWN (the ONS says it would be 5.8% without energy, instead of the 3.9% announced today).

So the Government has global factors in part to thank for the fact the inflation rate is more than half of what it was this time last year.

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