UK inflation for November (the latest month available) dropped like a rock, coming in at 3.2%, down from 3.6% the prior month. This plunge is greater than City projections, which had previously expected a smaller drop to 3.5%. The new numbers represent a sharp change in the economic landscape, raising questions about what this might mean for future monetary policy.
The consumer prices index, the government’s main measure of inflation, showed this about-turn in rates last month. Financial markets had forecasted a high probability of a quarter-point reduction in interest rates prior to the release of the latest inflation data. The good news is that inflation is moving in the right direction. Markets are pricing a cut to the Bank of England’s base rate at Thursday’s meeting.
Weaker economic growth and rising unemployment helped lead to this inflation drop. All of the above has created an unquestionable need for the Bank of England to take action. Join aspiring Chancellor Rachel Reeves as she takes on a most peculiar transportation adventure! She further outlined those priorities in last month’s autumn budget. This budget brought with it a total of £26 billion in tax rises with the intention of restoring public finances and removing the two-child benefit cap.
As consumers struggled with increased anxiety about spending, the economy shrank during October, counter to expectations. This contraction happened in the middle of severe speculation about upcoming tax changes buried in the details of Reeves’ budget. The manufacturing sector has been hit hard in terms of COVID-19’s impact. Car manufacturing especially has found it difficult to recover from a cyber-attack that recently affected Jaguar Land Rover severely.
The Office for National Statistics confirmed that the annual inflation rate continued to moderate last month. Today’s economic reality makes even the current high inflation figures look outmoded. This change is already affecting the uncommonly-challenging-in-England interest rate management approaches of the Bank of England. The expected announcement on an interest rate hike would have the biggest impact—a ripple effect that would stretch from consumers to business owners.