What does the bigger-than-expected fall in inflation mean for me?

By Isaac M December 20, 2023

UK inflation has dropped to its lowest level for more than two years thanks to falling fuel costs and another slowdown in food price rises.

The Office for National Statistics (ONS) said the rate of Consumer Prices Index (CPI) inflation fell to 3.9% in November, down from 4.6% in October.

Experts said the drop has increased speculation that the Bank of England will look to cut interest rates in early 2024.

Here the PA news agency looks at what is driving the fall in inflation and why it could mean some relief on borrowing costs for cash-strapped homeowners.

– What is inflation?

Inflation is the term used to describe rising prices. The inflation rate refers to how quickly prices are going up.

If the price of something rises from £10 to £11 over a year, then that would represent annual inflation of 10%.

Falling inflation does not mean prices are dropping, just that the pace of increases is slowing.

– What is behind the fall in inflation?

Inflation has been steadily easing back after hitting a peak of 11.1% in October last year.

Surging energy bills since Russia’s invasion of Ukraine in February 2022 were largely behind the eye-watering levels of inflation, although soaring food prices and many other costs have also put households under immense financial pressure.

Declines in inflation have picked up pace in recent months, with a dramatic fall seen in October, when the rate fell from 6.7% to 4.6%.

This was largely caused by the significantly lower energy price cap this year compared with the £2,500 limit seen a year earlier.

Food prices have also now fallen for eight months in a row, from a more than 45-year high of 19.6% in March to 9.2% in November.

– Why are hopes building for earlier interest rate cuts?

The fall in November was far bigger than expected by economists and by the Bank of England itself.

The Bank held interest rates at 5.25% last week and signalled that cuts are unlikely in the coming months, with governor Andrew Bailey stressing there is “still some way to go” in policymakers’ efforts to get inflation back down to its 2% target.

But the latest steep fall is expected to see the Bank significantly trim its inflation forecasts, paving the way for earlier rate cuts.

Many now believe the first cut could come in the first half of 2024, with financial markets betting on a reduction in May.

– What will this mean for households and businesses?

Homeowners in particular have been put under immense pressure as they have faced significantly higher mortgage costs following 14 rate rises in a row.

This has come on top of high energy, food and other costs.

The prospect of falling interest rates and lower mortgage borrowing costs will offer some welcome respite on the horizon and could provide a boost to the under-pressure housing market.

However, it would also see deposit rates come down, which would particularly affect those relying on savings returns for income.

– Are rate cuts in 2024 now odds on?

While financial markets are fully backing a cut next May, this is far from a done deal.

Some experts have cautioned that the path of inflation may not be smooth, with energy and fuel prices remaining volatile.

There are also some concerns that April’s National Living Wage increase and tax cuts in the autumn statement may fuel inflation.

But overall, experts agree that inflation is heading in the right direction to allow the Bank to at least soon begin considering lowering rates.


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