- Inflation falls to lowest rate since September 2021
- But Bank of England wants evidence of cooling wages before it considers rate cuts
The headline rate of UK inflation slowed to 3.9 per cent in November, down from 4.6 per cent in October. Core inflation (which strips out more volatile food, alcohol, energy and tobacco prices) also decelerated from 5.7 to 5.1 per cent.
According to the Office for National Statistics, the easing annual inflation rates reflected downward contributions from recreation, food and transport.
The latest figures were better than analysts expected, but more muted than last month's dramatic decline. In November, the headline rate of inflation fell from 6.7 to 4.6 per cent, driven by a swing in utilities price inflation as the impact of last year’s increase in the Ofgem price cap rolled off calculations. Since this was a one-off adjustment, a smaller change in the inflation rate was widely anticipated today. Nevertheless, the figures beat expectations and take the headline rate of inflation to the lowest level since September 2021.
What will happen to inflation next year?
According to the Bank of England’s latest forecasts, the headline rate of inflation will decline steadily next year, before returning to the 2 per cent target by the end of 2025. The Bank's November projections suggested that inflation would fall to 3.75 per cent by the middle of next year and hit 3.1 per cent by the final quarter of 2024.
But oil prices have tumbled since the BoE published its November forecasts, and sterling has also appreciated, lowering the cost of energy imports. As a result, analysts at Pantheon Macroeconomics calculate that Ofgem can decrease its default tariff cap by 10 per cent in April if wholesale prices remain steady.
If so, the headline rate of inflation could average just 2.7 per cent next year – far lower than rate-setters anticipated in November. Given that this is tantalisingly close to the 2 per cent inflation target, the BoE could be in a position to cut rates soon.
What does this mean for interest rates?
It was clear from BoE’s December meeting that rate-setters are worried about the possibility of an inflation resurgence. Policymakers warned that “further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures”, while the meeting minutes noted that wage inflation remains consistently higher in the UK than it is in either the US or the Euro area. Earlier this month, ONS data showed that annual growth in regular earnings had slowed to 7.3 per cent, but remained one of the highest rates on record.
On Tuesday, rate-setter Ben Broadbent warned that wage growth estimates are volatile, making it hard to get a clear reading of labour market conditions. He said it would probably require a more "protracted and clearer decline” for policymakers to “safely conclude that things are on a firmly downward trend”. As a result, many economists expect the BoE to pivot towards rate cuts later than either the Federal Reserve or the European Central Bank.
When will we see UK rate cuts?
Despite the better-than-expected inflation figures, economists do not expect to see rate cuts until the end of next year thanks to more persistent core and wage inflation.
Following today’s inflation figures, Yael Selfin, chief economist at KPMG, noted that "despite the improvement in November, inflation remains some way off target". She added that "today’s data will bolster the Bank of England’s argument that it remains too early to consider cutting interest rates", and only expects the Bank to pivot in the latter part of 2024.
Suren Thiru, economics director of the ICAEW also expects to see rate cuts towards the end of next year. Following the release, he said that “these inflation numbers suggest that the Bank of England is too pessimistic in its rhetoric over when interest rates could start falling". He added that "a deteriorating economy could push the Bank to start loosening policy by the Autumn, particularly if inflationary pressures continuing easing.”
