Traders bet on interest rate cuts as inflation drops to 3.9% in November
Inflation rates have fallen to 3.9%, its lowest level for more than two years, as Economics Editor Joel Hills reports
The pace of price rises has slowed dramatically. Happy Christmas.
The headline annual rate of inflation fell sharply in November to 3.9% last month, its lowest level for more than two years.
The Bank of England had 4.6% marked in.
Not so long ago, food and energy prices were driving inflation up, together they are now bringing the headline rate down again.
But the slowdown is more widespread. Core inflation - which excludes food and energy - eased to 5.1% last month.
According to the Office for National Statistics, a host of items fell in price during November including clothing, footwear, petrol, diesel, electrical goods, medicines, airfares, bikes, second-hand cars, toys, concert tickets and books.
As it stands, OFGEM is likely to lower its Energy Price Cap again in January and British manufacturers continue to report falling raw material costs.
The Bank of England believes could take until 2025 for the headline rate of inflation to finally return to its 2% target. This morning, Pantheon Economics - a forecaster - predicted it will get there before next summer.
The markets believe inflation has been tamed. Investors are betting Bank Rate - currently 5.25% - will be below 4% by December next year.
The Bank of England is far more cautious.
The Bank estimates that around one-third of headline rate of inflation (3.9%) can be attributed to wage growth.
In its view, “domestic” inflation is now the problem.
In a labour market where a historically low number of unemployed people are chasing an unusually high number of vacancies, the Bank worries that companies will continue to raise prices to attract and retain the staff they need.
Higher interest rates are designed to stamp out such behaviour. Higher unemployment will be the inevitable consequence.
The Bank wants to see Services Inflation - a decent proxy for wage growth - on a “firmly downward trend”. It’s not there yet, although Services CPI eased to 6.3% last month.
We should remember that 2023 began with inflation in double digits. The direction of travel is encouraging but the cost of living crisis is not yet over.
Food inflation has eased significantly but food prices are still 9% higher than they were a year ago and 27% higher than they were two years ago.
The misery this is causing is obvious. The Joseph Rowntree Foundation attempts to measure it.
An estimated 5.7 million low-income families have “reduced their spending on gifts for family” this Christmas and many “face the reality of not being able to afford presents or a Christmas dinner”.
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