The United Kingdom’s annual inflation rate has plummeted by more than half. Last month, it dropped to 3.2%, a decrease from 3.6% in October. Analysts predict this drop to shape the Bank of England’s future decisions on monetary policy. A majority of economists surveyed by the Wall Street Journal project a reduction in borrowing costs as early as December.
The British central bank is largely seen as cutting the base rate by 0.25 percentage points, to 0.75%. This would reduce it from its rapidly increasing level of 4%. In fact, after the new inflation data came out, market expectations for this first rate cut jumped over 95%. This dramatic increase has raised alarm bells and opened up debates from Congress to the Capitol.
Swati Dhingra, a leading inflation economist, recently confirmed that more than half of the inflationary spike of late was caused by transitory shocks. She reiterated her belief that the Bank should not be afraid to go deep with cuts. This follows last month’s action, which resulted in a razor thin five-four split among decision makers.
Regardless, inflation rates are heading in the right direction across the board. The annual services inflation is more stubbornly high at 4.4%, just a tick lower than 4.5% in October. This was the slowest pace for services inflation since December of 2024. Further good news on this front, with food price inflation dropping to an annual rate of 4.2%, down from 4.9% last month.
Rachel Reeves, one of the most important people in the Labour Party and shadow chancellor, will doubtless be pleased about this trend. She was already having to face the music from the £25 billion increase in employer national insurance contributions. This is change that came into effect last April. The good news is that the latest inflation figures will surely give her cover as she pushes for the economic policies that help everyday people.
The Bank of England’s Monetary Policy Committee will announce its decision on interest rates at noon on Thursday. This decision is likely to have huge repercussions for borrowers, and the UK economy more broadly. As discussions continue, the Trades Union Congress has highlighted the importance of potential rate cuts, stating that “a sequence of rate cuts…a shot in the arm that the economy needs.”