The sharper-than-expected drop in UK inflation to 3.2% last month has eliminated any lingering doubt about whether the Bank of England will deliver an early Christmas present by cutting the nation’s borrowing costs.
Bank policymakers announce their December decision at noon on Thursday, and after last month’s five-four split vote were already widely expected to cut the base rate by 0.25 percentage points from its current level of 4%.
However, they are likely to be reassured by the significant slowdown in the annual inflation rate, from 3.6% in October on the consumer prices index measure to 3.2% last month. After the snapshot dropped, market betting on the likelihood of a rate cut rose past 98%.
Some of the details were encouraging, too, with food price inflation in particular easing off, to an annual rate of 4.2% from 4.9% in October. That is still an eye-watering rate of increase in the weekly supermarket shop but a move in the right direction.
The Office for National Statistics highlighted month-on-month declines in the price of some foods, including a 4% fall in the cost of sugar, and 4.2% for pasta and couscous.
Annual services inflation remains high, at 4.4%, but that was down from a 4.5% rate in October, and the slowest rate since December 2024.
The news will be welcome to Rachel Reeves. With taxes set to rise and the labour market clearly slowing, she will hope for what the Trades Union Congress called for on Wednesday: “A sequence of rate cuts [to deliver] … a shot in the arm that the economy needs.”
The Bank’s nine-member monetary policy committee has been cautious in recent months, fearing the predicted short-term “hump” in inflation this year could instead become a longer-term phenomenon, as wage growth remained stubbornly high.
They cut rates in February, May and August – but narrowly decided to pause last month, as pre-budget speculation about the scale of tax rises reached fever pitch.
Policymakers have also been watching carefully to see how much of Reeves’s £25bn increase in employer national insurance contributions, which kicked in in April, would be passed on to consumers in higher inflation.
The answer appears to be, “some of it” – with some employers apparently also trimming hiring plans. But as a one-off jump in costs, this should become less of a worry over time.
However, some MPC members have become increasingly concerned about the impact of continuing to hold rates as high as 4% in a slowing economy.
The independent member Swati Dhingra argued in September that much of the inflation increase in the UK was because of temporary factors and would pass, so the Bank should not be “overly cautious” about cuts.
It was partly with the Bank’s rate setters in mind that Reeves took a series of measures in last month’s budget aimed at bringing inflation down, including by cutting household energy bills from next spring.
She will hope the latest inflation data confirms the worst of the inflation hump is over – and the Bank can respond swiftly with rate cuts, helping to restore the feelgood factor to a fragile economy in the new year.
