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UK inflation slowed much more sharply than expected in November to 3.9 per cent, down from 4.6 per cent in October, according to official data that will add to pressure on the Bank of England to start cutting rates in 2024.
The year-on-year rise in the consumer prices index was the lowest since September 2021 and was well below the 4.4 per cent reading predicted by economists in a Reuters poll, as inflation was pulled down by prices of food, fuel and recreation.
Core inflation, which excludes energy and food, rose by 5.1 per cent in the year to November, down from 5.7 per cent in the previous month, the Office for National Statistics said on Wednesday. That was also comfortably below economists’ forecasts.
The pound fell by 0.54 per cent against the dollar in early London trading to $1.266, while the FTSE 100 rose 1.5 per cent to its highest point since late May.
The figures will intensify speculation about when the BoE’s Monetary Policy Committee will start cutting the cost of borrowing after it raised rates to a 15-year high in a bid to tame high inflation.
Samuel Tombs, economist at the consultancy Pantheon Macroeconomics, said the “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”.
“Looking ahead, CPI inflation looks set to continue to fall more quickly than the MPC predicted in November,” he added.
The MPC voted this month to keep rates unchanged at 5.25 per cent and warned that it was confronting a more stubborn problem with inflation than policymakers in the US and euro area. Headline CPI growth remains higher in the UK than equivalents in the US and the EU.
The central bank has insisted it will not be rushed into lowering rates, as rate-setters wait for conclusive evidence in the labour market that they have done enough to return inflation to the 2 per cent target.
Ben Broadbent, a BoE deputy governor, on Monday said volatile, inconsistent data had made it hard to tell how fast wages were growing and why, adding to arguments for the MPC to wait longer before it cuts rates.
As well as high wage growth, the MPC has homed in on persistently high services inflation, which it sees as a key gauge of domestic price pressures.
But Wednesday’s figures offered some encouraging signs on that measure, with the CPI services rate easing from 6.6 per cent in October to 6.3 per cent in November. That came alongside “discounting across the board” on consumer goods, including clothing, household goods and cars, said James Smith, economist at ING, a bank.
Markets fully priced in a quarter-point rate cut for May after the ONS data was published. According to LSEG data, traders are also pricing in a roughly 50 per cent chance that the BoE will lower rates by the same amount in March.
Chancellor Jeremy Hunt welcomed the new data, saying it showed that “we are starting to remove inflationary pressures from the economy”.
“Many families are still struggling with high prices so we will continue to prioritise measures that help with cost of living pressures,” he added.
Rachel Reeves, shadow chancellor, said the decline in inflation would be a “relief to families”, but added: “Prices are still going up in the shops, household bills are rising, and more than 1mn people face higher mortgage payments next year after the Conservatives crashed the economy.”
Additional reporting by Oliver Ralph and George Steer in London