The UK economy demonstrated notable improvement in November, with inflation reaching a two-year low. In light of this development, the likelihood of the Bank of England implementing interest rate cuts shortly has heightened.
A report from the Office for National Statistics revealed that annual inflation eased to 3.9% in November, a drop from October's 4.6%, largely attributed to lower petrol prices.
This figure, below experts' expectations of 4.4% according to a Reuters economist survey, marks the lowest level since September 2021. Core and services inflation, focal points for the Bank of England, also experienced declines.
In response to these data, investors are contemplating the possibility of a Bank of England interest rate cut by May 2024. Sterling depreciated against the US dollar, slipping from $1.271 to $1.266, while British government bond yields witnessed significant declines.
Despite the alignment of UK inflation with France in international comparisons, UK consumer prices have surged by 21% since 2020—among the highest rates in G7 advanced economies and the peak in Western Europe.
Bank of England officials approach the situation cautiously, refraining from concluding that decreasing inflation signals a sustained reduction in price pressures. Chancellor of the Exchequer Jeremy Hunt emphasized that the data indicates a softening of inflationary pressures in the economy, while Labor’s shadow chancellor Rachel Reeves noted the decline in the population's situation during the 13-year Conservative rule.
Unexpectedly, core inflation, excluding energy and food, saw a decline to 5.1% from 5.7%, whereas services inflation dropped to 6.3% from 6.6%.
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