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Inflation has fallen faster than expected to its lowest level in over two years, dragged down by easing petrol and food prices, adding impetus to growing calls for the Bank of England to begin lowering interest rates next year.
Prices rose 3.9 per cent over the year to November, down from an increase of 4.6 per cent in October, according to the Office for National Statistics.
The fall was well below City analysts’ expectations of a decline to 4.3 per cent and means that inflation is now down to its lowest mark since October 2021.
Declining price growth in grocery, transport and leisure and recreational activities were the main factors that drove down the headline rate of inflation. Food inflation dropped to 9.2 per cent from 10.1 per cent, the ONS said.
Grant Fitzner, ONS chief economist, said: “Inflation eased again to its lowest annual rate for over two years, but prices remain substantially above what they were before the invasion of Ukraine.
“The biggest driver for this month’s fall was a decrease in fuel prices after an increase at the same time last year. Food prices also pulled down inflation, as they rose much more slowly than this time last year. There was also a price drop for a range of household goods and the cost of second-hand cars.”
November’s inflation figure was better than the 4.6 per cent expected by the Bank of England, signalling that price pressures have cooled faster than the central bank expected. Analysts expect that trend to continue, which would raise the chances of the Bank of England’s monetary policy committee discussing the possibility of lowering borrowing costs at their meetings early next year.
Last week the MPC elected to keep the UK base rate unchanged for the third meeting in a row at a 15-year high of 5.25 per cent. In the run-up to the meeting, financial markets had priced in a sharp reduction in borrowing costs next year of around one percentage point, sparked by the United States central bank, the Federal Reserve, signalling that it may loosen policy soon.
However, the MPC and Andrew Bailey, the Bank of England governor, pushed back against those bets, stressing that the UK base rate must remain in restrictive territory for an “extended period”.
Three members of the nine-strong MPC voted to increase the base rate by 0.25 percentage points, citing concerns about persistent wage growth and services inflation. Ben Broadbent, a deputy governor at the Bank, said this week that rates may need to stay elevated to curb salary increases.
The ONS said today that services inflation, which the Bank monitors closely, fell to 6.3 per cent, lower than the Bank’s 6.9 per cent projection for November. Core inflation, which removes volatile food and energy prices, eased to 5.1 per cent from 5.7 per cent.
Most analysts expect stagnant growth compounded by receding inflation will force the Bank into a loosening of financial conditions next year. However, robust pay growth and falling inflation would deliver a boost to living standards and spending, lifting economic growth.
Jeremy Hunt, the chancellor, said there was “still further to go” on tackling inflation.
