Surprise as the UK’s inflation rate drops to 3.9%

There was surprise as CPI inflation rate drops to 3.9% in November – meaning the prospect of a base rate cut next year is more likely.

This represents a reduction from 4.4% in October, and means it’s getting closer to the Bank of England’s 2% target.

Samuel Tombs, economist at research consultancy Pantheon Macroeconomics, described is as a “surprisingly sharp fall”, adding that it means the Bank of England is likely to cut the base rate in the first half of 2024.

Ed Monk, an associate director at Fidelity International, agreed.

Monk said:

“The Bank of England has been talking tough, but price rises appear on a rapid decline back towards the Bank’s target range and it may soon be that the risk for rate-setters is not under-tightening but over-tightening.”

While the Bank opted to hold the base rate again last week, three members of the Monetary Policy Committee voted for an increase.

With this latest reduction in inflation, you wonder whether holding the base rate will be more unanimous at the next meeting, which is on February 2nd.

On a monthly basis inflation fell more than economists expected, as it declined by 0.2% in November despite economists predicting a 0.1% increase.

Core inflation – excluding food, energy alcohol and tobacco – stood at 5.1% in November, down from a forecast of 5.6%.

Nicholas Hyett, investment analyst, Wealth Club, reckons this fact means the Bank will still move slowly the raise the base rate.

Hyett said:

“The fall in inflation has been driven largely by lower oil & gas and food prices, with core inflation still high at 5.1%.

“Commodity prices aren’t something governments or even central banks have much control over – and until core inflation (reflecting things like domestic pay rises) is back closer to target we suspect the Bank of England will remain cautious on interest rates.”

Inflation peaked at 11.1% in October 2022.

Tomer Aboody, director of property lender MT Finance, said:

“As we near the end of the year, more confidence is coming through and with interest rates on hold, combined with another fall in inflation, we should see a better and stronger market in 2024.

“With the government desperate for some positive news, a restructure of stamp duty may also be on the cards to further bolster positivity and activity.”

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