- Written by Michael Reese
- Business correspondent, BBC News
The surprise drop in inflation in November raised hopes that the Bank of England would start cutting interest rates sooner than expected.
Inflation – the rate at which prices rise – fell from 4.6% to 3.9% last month, the lowest level in more than two years.
The bank has repeatedly increased interest rates in an attempt to control inflation, leading to higher mortgage payments for millions.
But some economists believe they may start reducing them in the first half of 2024, much earlier than previously expected.
The Office for National Statistics (ONS) said falling petrol prices were largely behind the surprise drop in inflation last month.
The slowdown in prices of food and household goods also contributed to this.
But while inflation is well below its peak in 2022, it is still almost double the Bank of England’s 2% target, and many households will not feel better off as their energy bills and borrowing costs remain high.
Danny Hewson, head of financial analysis at AJ, said: “It remains important that no one forgets that while inflation is falling it does not mean prices are falling, and that not everyone has seen wages rise above inflation over the past two years.” bell.
She added: “Some families will feel fearful this Christmas, feeling guilty about the gifts they have been able to afford, or worried about paying off the debt they have accumulated just to buy essential festive gifts.”
Gasoline and diesel prices reached record levels in 2022, following Russia’s invasion of Ukraine and global oil prices rising.
But gas station prices have fallen and are now at their lowest level in more than two years. One liter of unleaded drink costs around £1.43 on average, a price last seen in UK forecourts in October 2021.
Meanwhile, prices of a variety of baked goods, including sliced white and wholemeal bread, along with tins of cakes, fell between October and November after rising a year earlier.
Rising prices for milk, cheese and eggs have also slowed, but the costs of olive oil, sugar and onions are still much higher, meaning food prices are still 9.2% higher than they were at this time in 2022.
The last time UK inflation was below 3.9% was in September 2021 when it was 3.1%. Most economists had expected UK inflation to fall to 4.3% last month.
But while the cost of living crisis may be beginning to ease, many households and businesses remain under pressure.
Chef Seema Dalvi, at Dalvi restaurant in Bolton, Lancashire, told the BBC that although price rises were slowing, “inflation is definitely killing us.”
She used to order all her ingredients from one supplier but now shops around for the best deals.
But it’s not just rising food prices that Dalvi has to deal with. “Energy prices, rents, business prices, ingredient prices, alcohol prices, employee salaries, it’s all a lot,” she said.
Although gas and electricity prices are lower than last year, most households will actually pay more for energy this winter than in 2022 because government subsidies for bills are no longer in place.
The Bank of England has also raised interest rates 14 times since December 2021 to try to slow the rise in prices. Interest rates are now at 5.25%, the highest level in 15 years, leading to higher borrowing costs for mortgages but also higher savings rates.
Last week, the bank’s governor, Andrew Bailey, ruled out cutting interest rates any time soon, despite weak economic growth.
However, Martin Beck, chief economic adviser to the EY Item Club, said on Wednesday that the bank would now find it more difficult to justify its “rise due to its longer rhetoric on interest rates.”
Samuel Tombs, of Pantheon Macroeconomics, added: “The surprisingly sharp decline in CPI inflation in November raises the possibility that… [Bank’s] The Monetary Policy Committee will start cutting interest rates in the first half of 2024, much earlier than it has been willing to indicate so far.
The UK’s inflation rate remains higher than in other countries including the US and Germany, but the gap is narrowing.
The fall to 3.9% in November puts the UK on par with France, but ahead of the EU average of 3.1% and the US of 2.1%.
Treasury Secretary Jeremy Hunt said the latest inflation figures had put the UK back “on the right and sustainable path”. [economic] growth,” but the government “will continue to prioritize measures that help alleviate cost-of-living pressures.”
But Rachel Reeves, Labour’s shadow finance secretary, said: “Prices are still rising in shops, household bills are rising and more than a million people face higher mortgage repayments next year after the Tories destroyed the economy.”
Additional reporting by Priya Patel, Economics Producer
Nick Erdley, BBC’s verification correspondent
When inflation started to rise and rise – the government blamed global challenges. They had a point.
A large part of the cause of inflation was rising energy prices. But they have now fallen, helping to push inflation down.
The impact of energy on inflation numbers is very stark.
If you looked at inflation at this time last year, with power removed from the numbers, it would have been much lower at 7.4% (it was 10.7%). The price of energy was pushing inflation higher.
The opposite is happening now.
Falling energy prices have led to lower UK inflation (the ONS says it will be 5.8% without energy, rather than the 3.9% reported today).
So the government has global factors to thank in part for the fact that inflation is more than half what it was this time last year.
How can I save money at my food store?
- Look at your closets so you know what you already have
- Head to the mini section first to see if it contains anything you need
- Buy items close to their best before date which will be cheapest and use your freezer