By Ed Frankl
Consumer prices in Britain cooled more than expected in November, keeping the Bank of England on course for the fourth interest-rate cut of the year this week, amid signs of weakness in the labor market and a slowing economy.
The U.K's Office for National Statistics said Wednesday that the annual rate of inflation was 3.2% last month, the lowest since March and down from 3.6% in October. Economists polled by The Wall Street Journal expected 3.5%.
Inflation has therefore eased more rapidly from a lower peak than BOE policymakers had expected. The figures were released as officials prepared to vote on policy later Wednesday, with the decision to be announced Thursday. Sterling fell against the dollar after the inflation print.
"Inflation is fading much faster than everyone thought," said Paul Dales, chief U.K. economist at Capital Economics, in a note to clients.
The big fall in inflation will surely be enough to prompt BOE Governor Andrew Bailey to "give borrowers the early Christmas present of a cut in interest rates", he said.
The central bank paused its quarterly rate-cutting cycle in November, in part due to continued price pressures, but it expects inflation to fall to 2.5% by the final quarter of 2026, it said at its November policy meeting.
Thomas Pugh, chief economist at consulting firm RSM U.K., said November's drop in inflation effectively nails on a rate cut this week.
"It also opens the door to a cut early next year, especially as inflation is set to slow further over the course of 2026," he said in a note.
Policymakers chose to hold rates by a tight 5-4 vote last month. The decision announced this Thursday will likely again be close, though Bailey is expected to switch sides to vote with a rate cut. In November, he said he expects further policy easing should a course of lower inflation become clearer.
Inflation fell from a pandemic-era high of 11.1% in 2022 to the BOE's 2% target in May of last year, but crept up steadily from the fall of 2024 to peak at 3.8% this September.
Bailey aside, the nine-member rate-setting committee has divided into two camps. One is more concerned with sticky inflation, particularly in food and services, alongside constraints in labor supply that are keeping costs for businesses high.
Lower food prices, which traditionally rise at this time of year, were the main driver of the fall in inflation, ONS Chief Economist Grant Fitzner said. Services inflation also eased slightly to 4.4% from 4.5% in October.
The other camp points to a creaking jobs market and declining wage growth as a reason to be comfortable in cutting rates this week. In ONS data published Tuesday, the unemployment rate edged up to a near five-year high of 5.1% in the three months through October, while the measure of private-sector regular wage growth--closely watched by the BOE--fell to 3.9% from 4.2%.
Some of the jitters in the labor market shown up in the data might have come from uncertainty ahead of the government's budget late in November, which might also have a damping effect in the near-term on inflation due to measures to cut energy bills, freezing of rail fares and a continuation of a postponement of rises in fuel duty
Treasury Chief Rachel Reeves said she hoped the budget would give more room for the BOE to lower borrowing costs.
Economists had pointed to elements of the governing Labour Party's budget from the prior year that had pushed inflation higher in the early part of 2025, such as new payroll taxes on firms and government-regulated utility bills.
The latest budget's measures will likely lower the annual rate of inflation, but wasn't clear that interest-rate cuts would follow, BOE Deputy Governor Clare Lombardelli told lawmakers last week.
Write to Ed Frankl at edward.frankl@wsj.com
(END) Dow Jones Newswires
12-17-25 0323ET
