The rate of inflation fell sharply again in November in what was described as an "early Christmas present" for consumers, official figures reveal today.
The headline measure of the rise in the cost of living, the Consumer Prices Index (CPI) dropped to 3.9% from 4.6% in October, a much bigger fall than expected by City economists.
The CPI is now at its lowest level for two years raising hopes that interest rates will start to be cut by the middle of next year.
The better than forecast news sent shares soaring with the FTSE-100 up almost 100 points, or around 1.25%, in early trading. But the pound fell more than half a cent against the dollar to $1.2658.The drop allows Rishi Sunak to claim definitively that he has fulfilled his start of the year pledge that inflation would be halved in 2023.The Office for National Statistics (ONS) said that the lower cost of fuel, second hand cars, computer games and bread were all factors behind the latest drop in the CPI.
But core inflation — which strips out food, energy, alcohol and tobacco — fell only to 5.1 per cent, from 5.7 per cent in October.
ONS chief economist Grant Fitzner said “Inflation eased again to its lowest annual rate for over twoyears, but prices remain substantially above what they were before the invasionof Ukraine.
“The biggest driver for this month’s fall was a decrease in fuel prices after an increase at the same time last year. Food prices also pulled down inflation, as they rose much more slowly than this time last year.
“There was also a price drop for a range of household goods and the cost of second-hand cars.
“Factory gate prices remain little changed over the past year, while on an annual basis the change in costs that producers pay for raw materials and fuel was negative for the sixth consecutive month.”
But inflation is still running well above the Bank of England’s target of 2% meaning that there are unlikely to be any cuts in interest rates until well into 2024.
Chancellor of the Exchequer Jeremy Hunt said: “With inflation more than halved we are starting to remove inflationary pressures from the economy."Alongside the business tax cuts announced in the Autumn Statement this means we are back on the path to healthy, sustainable growth. But many families are still struggling with high prices so we will continue to prioritise measures that help with cost of living pressures.”Inflation peaked at 11.1% in October 2022 after Russia’s full scale invasion of Ukraine sent gas prices rocketing and triggered a global cost of living spiral.
It has fallen back rapidly in recent months, particularly this October when energy prices dropped sharply..
But economists are forecasting that the slowdown in price rises will be far more gradual in the coming months. Although oil prices have subsided over recent weeks, the latest crisis in the Red Sea, where oil tankers have come under attack, could force energy costs back up again.
With other cost pressures still remaining, the Bank is forecasting that inflation will not return to target for another two years.
Yesterday the Bank's new deputy governor for financial stability Sarah Breeden said in a speech that "monetary policy needs to be restrictive for an extended period to keep pushing down on inflation and return it sustainably to target."
But recent data showing that wage growth slowed at the fastest pace for two years in the three months to October has reinforced forecasts for rate cuts, with financial markets now pencilling in just over three reductions next year, starting in June.
Ed Monk, associate director at Fidelity International, said: "Another significant drop in inflation in November only adds to the case that interest rates will fall sooner than expected.
"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. “The last portion of above-target inflation may still prove difficult to shift - wages may have peaked but remain high by historical standards - and the Bank of England will want to be sure that enough demand hasseeped out of the economy before it eases borrowing costs. "
Thomas Pugh, economist at leading audit, tax and consulting firm RSM UK, said: ‘The further sharp decline in inflation from 4.6% to 3.9% in November was significantly larger than expected by economists and the Bankof England and suggests the first interest rates cuts may be closer than we had thought.
"More importantly for the Monetary Policy Committee (MPC) core and services inflation, which strip out volatile food and energy prices, also fell sharply and both came in lower-than-expected. An excellent early Christmas present for the MPC and consumers alike!
Indeed, inflation is now almost a full percentage below the forecast the MPC made only back in November. If this trend continues it suggests that the MPC may be able to start cutting interest rates as early as May. "
Nicholas Hyett, Investment Analyst at the Wealth Club said: "The fall in headline inflation to 3.9% marks a dramatic and unexpected fall in UK inflation. While we're still seeing prices rise fasterthan the US and Europe, the UK is no longer the outlier it once was.
"Lower rates of food and drink inflation, cheaper games and toys and lower fuel costs will have been a welcome Christmas miracle for cash strapped families ahead of the festive period, and retailers will welcome aflusher consumer too."
