The latest inflation data released by the Office for National Statistics (ONS) brings a surprising and positive turn to the cost of living crisis in the UK. In November 2023, prices in the country experienced a 0.2% decrease compared to October, marking the first decline in four months. The annual inflation rate also saw a substantial slowdown, dropping to 3.9% from the previous month’s 4.6%. This figure is well below forecasts and represents the lowest rate since September 2021.
Core inflation, which excludes the volatile food and energy sectors, continued its downward trend for the fourth consecutive month, reaching 5.1% in November, the lowest level since January 2022. Every month, core prices fell by 0.3%.
The price decline is attributed to various factors, including a notable drop in transport costs, influenced by lower oil and gas prices. Housing and utility costs also saw a continued decrease. However, specific sectors, such as food, beverages, tobacco, clothing, and health, experienced price increases, albeit slower than in November of the previous year. Food inflation remains high at 9.2%.
Danni Hewson, Head of Financial Analysis at AJ Bell, described the inflation numbers as a “welcome shot in the arm for the UK economy,” emphasising the unexpected and dramatic fall in headline inflation. Nicholas Hyett, Investment Analyst at Wealth Club, noted that while prices are rising faster than in the US and Europe, the UK is no longer the outlier it once was.
Despite the positive trend, analysts caution against premature celebration. Core inflation, currently more than double the UK’s target of 2%, needs to slow significantly before the Bank of England (BoE) considers cutting key interest rates. The BoE’s key rate is at a record high of 5.25%, but investors are optimistic, anticipating a potential rate cut shortly. Rate expectations suggest growing confidence that cuts to the base rate could begin as early as March, with expectations that the economic landscape will undergo significant changes by the same time next year.
However, analysts warn that recent price drops could be reversed if geopolitical events, such as the situation in the Red Sea, impact the cost of goods and energy. Despite the positive developments, cautious sentiment prevails as the UK navigates the ongoing economic challenges.
Danni Hewson concludes, “It’s Christmas, and we should take a moment to celebrate how far we’ve come, as long as we don’t forget the miles left to travel.”
