UK inflation eased to , falling to 3% and bolstering expectations that the Bank of England may initiate interest rate cuts as early as . The decline, reported by the Office for National Statistics on , marks the lowest rate since and a significant step down from ‘s 3.4%.
The slowdown in price increases was largely driven by falling costs in transport and food, with airfares and petrol prices contributing significantly to the overall decrease. Specifically, the average price of petrol fell by 3.1p a litre between and , reaching 133.2p a litre, while diesel prices decreased by 3.2p to 142.5p a litre. The rise in prices for food and non-alcoholic drinks also slowed sharply, decreasing from 4.5% in to 3.6% in , reaching a nine-month low.
This latest figure aligns with the forecasts of most City economists and comes after the Bank of England held interest rates steady at 3.75% earlier this month, a decision that was closely contested with some policymakers advocating for an immediate quarter-point cut. The central bank’s deliberations were influenced by signs of weakening demand and a cooling labour market, as evidenced by recent unemployment figures.
official data released on revealed that unemployment rose to 5.2% at the end of last year, the highest level in five years. Simultaneously, wage growth has slowed, further supporting the case for a rate reduction. This combination of factors is leading analysts to believe that a cut in is now “highly likely,” according to Rob Wood, an economist at Pantheon Macroeconomics.
Core CPI inflation, which excludes volatile items like energy, food, alcohol, and tobacco, also edged down to 3.1% from 3.2% in the year to . Services inflation, a key metric closely monitored by the Bank of England for underlying inflationary pressures, decreased from 4.5% to 4.4%, although it remained slightly above the Bank’s forecast of 4.1%. Despite this slight deviation, analysts do not anticipate it will deter the central bank from considering a rate cut next month.
The Bank of England anticipates that inflation will fall to around its 2% target from , aided by measures implemented in the recent Budget aimed at curbing bill increases. Zara Nokes, global market analyst at JPMorgan Asset Management, suggested that the UK has “finally turned a corner” in its battle against inflation, noting a “meaningful step down” in headline inflation across various sectors.
The impact of these developments was immediately visible in financial markets. The pound remained relatively stable against the dollar, trading at $1.357 in early trading. However, traders increased their bets on a rate cut, with swaps contracts indicating a greater than 85% probability of a quarter-point reduction.
Chancellor Rachel Reeves responded to the figures, emphasizing the government’s commitment to reducing the cost of living. She highlighted measures taken in the Budget, including a £150 reduction in energy bills, a freeze on rail fares – the first in 30 years – and a continued freeze on prescription fees.
While the decline in inflation offers a welcome respite for households and businesses, the Bank of England faces a delicate balancing act. Policymakers must weigh the need to stimulate economic growth against the risk of allowing inflation to rebound. The latest data suggests that the central bank may be leaning towards a more dovish stance, but the ultimate decision will depend on a comprehensive assessment of the economic outlook and the evolving inflationary landscape.
