Consumer price inflation in Britain fell much more sharply than forecast to its lowest since March, official data showed on Wednesday, cementing expectations for the Bank of England (BoE) to cut rates on Thursday.
The decline in inflation to 3.2% from 3.6% in October reflected falls in the cost of cakes, biscuits, cereals and confectionery, as well as a smaller impact from tobacco prices and Black Friday discounts on women's clothes, the Office for National Statistics (ONS) said.
The reading was below all forecasts in a Reuters poll of economists – which had pointed to a fall to 3.5% – and undershot the BoE's own expectation of a drop to 3.4%.
The sterling dropped by more than half a cent against the U.S. dollar after the data came out, while interest rate futures priced in a near 100% chance of a quarter-point rate cut on Thursday and a higher chance of multiple rate cuts in 2026.
Before the decision, markets had priced in a more than 90% chance of the BoE cutting rates by a quarter point to 3.75% on Thursday, but many economists had viewed the decision as finely balanced and still see the BoE nearing the end of its rate-cutting cycle.
"An MPC interest rate cut tomorrow is beyond doubt now that inflation surprised to the downside," said Rob Wood, chief U.K. economist at Pantheon Macroeconomics.
"But much of the inflation surprise will likely unwind in the coming months because it was concentrated in erratic or volatile items ... or was likely driven by the temporary effect of early Black Friday discounts," he said.
Underlying inflation measures soften
Wednesday's data showed services price inflation, which the BoE sees as a guide to longer-term price pressures, fell to 4.4% rather than holding at 4.5% as economists and the BoE had expected. Food and nonalcoholic beverage inflation dropped to 4.2% from 4.9% in October.
The BoE had said it expected it to reach 5.3% in December, the highest in nearly two years. Core consumer price inflation – which excludes more volatile food, alcohol, energy and tobacco prices – also slowed to 3.2% rather than holding at 3.4% as economists had forecast in the Reuters poll.
Last month, the BoE's Monetary Policy Committee (MPC) voted 5-4 to keep interest rates on hold, breaking the quarterly cadence of rate cuts it followed since 2024, and economists polled last week expected a December rate cut by only a narrow 5-4 margin.
Of those members who opposed a cut in November, Governor Andrew Bailey looks most likely to switch sides as he said in minutes of the decision that he wanted to see further falls in price pressures "this year" before backing a cut.
Budget to ease pressure on bills
British inflation has been higher than in other major advanced economies, and in November the central bank forecast it would remain above its 2% target until the second quarter of 2027.
Since then, Treasury chief Rachel Reeves announced measures in her Nov. 26 budget that will shift climate change costs away from levies on energy bills towards general taxation.
BoE Deputy Governor Clare Lombardelli said the move might temporarily lower inflation by up to half a percentage point from April 2026 – potentially allowing the BoE to hit its CPI target sooner – but do little to change the longer-term outlook.
Part of Britain's higher inflation this year reflects rises in regulated prices, such as utility bills, introduced in April at the same time as a big increase in employers' social security payments.
But some of the higher inflation also reflects wage growth, which remains well above the level of around 3% that most of the MPC view as compatible with 2% inflation. Private-sector growth in regular pay slowed to 3.9% in the three months to October, its lowest since December 2020, but it remains above the 3.5% the BoE forecasts for the final quarter of the year.
MPC members are divided on the extent to which they expect rising unemployment to dampen wage growth and how much this will be offset by structural problems that have been present around labour force participation since the COVID-19 pandemic.