In November, the Consumer Price Index (CPI) inflation in the United Kingdom surprised analysts by dropping to 3.9%, down from the October figure of 4.6%, according to the latest statistics from the Office for National Statistics (ONS). The monthly change revealed a 0.2% decrease in CPI for November, in contrast to a 0.4% increase observed in the same month the previous year.
CPIH inflation, which incorporates housing costs for owner-occupiers, also experienced a decline, recording a 4.2% rise over the year, compared to 4.7% in October. The notable contributors to the reduction in both CPIH and CPI annual rates were identified as transport, recreation and culture, along with food and non-alcoholic beverages.
Examining core CPI, excluding energy, food, alcohol, and tobacco, there was a decrease from 5.7% in October to 5.1% in the year to November. Furthermore, the annual rate for CPI goods slowed from 2.9% to 2.0%, while the annual rate for CPI services eased from 6.6% to 6.3%.
Derrick Dunne, CEO of YOU Asset Management, expressed surprise at the speed of the decline in inflation, suggesting it raises questions about the possibility of interest rate cuts by the Bank of England. However, Dunne emphasized that despite the welcome fall in inflation, the Bank of England is likely to remain cautious, given that inflation still exceeds its long-term target. He anticipates that rate cuts, if considered, may only occur in the second half of the year.
Debapratim De, senior economist at Deloitte, acknowledged the positive news of the sharper-than-expected fall in inflation but cautioned against expectations of a significant shift in the Bank of England's hawkish stance on interest rates. Measures of underlying pricing strength, such as core and services inflation, have eased but continue to remain at elevated levels.
Adam Oldfield, chief revenue officer at Phoebus Software, welcomed the greater-than-anticipated drop in inflation, noting that it aligns with rising wages and could potentially lead to improved financial conditions for many. Oldfield suggested that while interest rates may not decline immediately, there could be a possibility of decreases by the second quarter of 2024 if inflation continues to trend downward. He highlighted market signals, with mortgage rates already reflecting an anticipation of such a scenario.
In summary, the unexpected fall in inflation has sparked discussions about the timing of potential interest rate cuts by the Bank of England. Analysts differ on the immediate implications, with some cautioning against a shift in the central bank's stance and others anticipating the possibility of rate decreases in the coming months, contingent on the trajectory of inflation.
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