U.K. Inflation Slows More Than Forecast, Fueling Rate-Cut Bets

(Bloomberg) -- UK inflation slowed far more than economists forecast in November, a surprise that prompted traders to boost bets the Bank of England will soon have to abandon its higher-for-longer narrative on interest rates. 

Consumer prices rose 3.9% from a year earlier, down from 4.6% in October, according to data released by the Office for National Statistics on Wednesday. The slowdown was much sharper than the 4.3% economists had expected. None had predicted prices rising by less than 4.2%.

Traders responded by ramping up bets on BOE interest-rate cuts next year to as much as 145 basis points, the most in the current cycle. That means five quarter-point cuts are fully priced. The 10-year gilt yield fell as much as 11 basis points to 3.54%. The pound extended losses, falling as much as 0.6% to $1.2658, while UK stocks surged, led by homebuilders.

It marked the first time food price inflation — one of the biggest drivers of Britain’s cost-of-living crisis — has been in single digits since June 2022. Auto fuel prices also contributed to the slowdown. Services inflation, which the BOE has repeatedly cited as a persistent source of price-pressure concern, dropped to the lowest since January.

The results represented the third downward surprise in the past four months and the biggest since inflation concerns took hold in 2021. Consumer prices fell 0.2% between October and November, the biggest decline for the month since 2014.

The data come less than a week after BOE Governor Andrew Bailey made his latest attempt to push back against market expectations for a pivot toward easing. Bailey said “there is still some way to go” in the fight against inflation on Thursday, after the bank’s Monetary Policy Committee voted to leave rates at a 15-year high for their third-straight meeting. 

“The surprisingly low reading in today’s UK CPI figures is questioning last week’s impression after the MPC meeting that the UK might be one of the slow movers when it comes to rate cuts in 2024 and beyond,” said Ulrich Leuchtmann, head of FX research at Commerzbank AG in Frankfurt.

The figures give Prime Minister Rishi Sunak a bright spot to focus on as he heads into an election year trailing the opposition Labour Party by about 20 percentage points in public opinion polls. Sunak had begun the year vowing to halve the rate of inflation, which was then running at more than 10%. 

“With inflation more than halved we are starting to remove inflationary pressures from the economy,” Chancellor of the Exchequer Jeremy Hunt said, saying budget policies announced last month would help spur growth, as well. “Alongside the business tax cuts announced in the Autumn Statement this means we are back on the path to healthy, sustainable growth.”

Underlying measures of prices being watched closely by the BOE for signs of persistent inflation also cooled more than expected. Core inflation — which strips out volatile food and energy costs — eased to 5.1% from 5.7%, while services inflation fell to 6.3%, down from 6.6%. Services prices are being monitored by the BOE for signs that the tight labor market is still fueling wages and feeding into prices.

“This startling fall in inflation will further reassure people and businesses that there is light at the end of the tunnel in the struggle against eye-watering price rises,” said Suren Thiru, economics director at accountancy trade body the ICAEW. “These inflation numbers suggest that the Bank of England is too pessimistic in its rhetoric over when interest rates could start falling.”

Investors have ramped up their bets on reductions to borrowing costs after sharp falls in inflation and signs that the US Federal Reserve is close to a pivot in policy. After the BOE’s latest policy meeting last week, Bailey pushed back against the growing speculation and warned that “there is still some way to go” in the fight against inflation. The BOE had no advance sight of the latest inflation figures at the time. 

Inflation is still almost double the BOE’s 2% target and higher than the US and the euro zone. “Inflation eased again to its lowest annual rate for over two years, but prices remain substantially above what they were before the invasion of Ukraine,” ONS Chief Economist Grant Fitzner said Wednesday. 

Food prices rose 9.2% from a year earlier, down from 10.1% in October. Auto fuel prices were down 10.6% after dropping 2.4% on the month.

Prices of recreational and cultural goods and services were also driving down inflation, sliding 0.4% between October and November. The largest downward contributions came from games, toys and hobbies — particularly computer games — and cultural services, especially admission fees to theaters and live music events.

The fall in producer prices — which often signal costs coming down the pipeline for consumers — was smaller than predicted. Factory gate prices dropped 0.2% compared to a year earlier, below the 0.5% slump predicted by economists. The 2.6% tumble in input costs that producers pay for raw materials and fuel was unchanged from the previous month.

“The most important detail is in the services measure,” Ana Andrade, of Bloomberg Economics, told Bloomberg Television. “This data print definitely increased the chances of an earlier cut.”

--With assistance from Joel Rinneby, Harumi Ichikura, David Goodman and Naomi Tajitsu.

(Updates with market reaction in first and third paragraphs.)

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