Inflation drop makes Bank of England early Christmas present to Reeves almost a certainty | Inflation
The sharper-than-expected drop in UK inflation to 3.2% last month has removed any doubt about whether the Bank of England will deliver an early Christmas gift by cutting the country’s borrowing costs.
Bank policymakers announced their December decision at noon on Thursday, which was already widely expected to cut the base rate by 0.25 percentage points from its current 4% level, following a split five-to-four vote last month.
However, they are likely to be reassured by the significant slowdown in the annual inflation rate, from 3.6% in October to 3.2% last month, according to the consumer price index. After the snapshot fell, market bets on the possibility of a rate cut rose to over 98%.
Some details were also encouraging; especially the decline in food price inflation from 4.9% in October to 4.2% annually. This is still an eye-watering rate of increase in weekly supermarket stores, but it’s a move in the right direction.
The Office for National Statistics highlighted monthly declines in some food prices, including a 4% drop in the cost of sugar and a 4.2% drop in the cost of pasta and couscous.
Annual services inflation remains high at 4.4%, but this is lower than October’s 4.5% rate and the lowest rate since December 2024.
The news will be welcomed by Rachel Reeves. In an environment where taxes will rise and the labor market clearly slow down, he will hope for what the Trades Union Congress called on Wednesday to come true: “A series of interest rate cuts” [to deliver] …what the economy needs is a shot in the arm.”
The bank’s nine-member monetary policy committee has been cautious in recent months; He feared that the projected short-term “hump” in inflation this year could turn into a longer-term phenomenon as wage growth remained stubbornly high.
They cut interest rates in February, May and August, but narrowly decided to cut them last month as pre-budget speculation about the size of tax increases reached fever pitch.
Policymakers are also carefully watching how much of Reeves’ £25bn increase in employer national insurance contributions, which started in April, will be passed on to consumers in higher inflation.
The answer seems to be “some”; Some employers are also apparently cutting back on hiring plans. However, since it is a one-time increase in costs, this will become less of a concern over time.
But some MPC members have become increasingly concerned about the impact of keeping interest rates as high as 4% in a slowing economy.
Independent member Swati Dhingra argued in September that much of the increase in inflation in the UK was due to temporary factors and would pass, so the Bank should not be “overly cautious” about cuts.
It was partly on the Bank’s rate-setters’ mind that Reeves introduced a series of measures in last month’s budget aimed at reducing inflation, including cutting household energy bills from next spring.
He hopes the latest inflation data will confirm that the worst period of inflation is over and that the Bank can react quickly with rate cuts and help restore the feel-good factor of a fragile economy in the new year.
