Sharp inflation slowdown leaves door to interest rate cut wide open

The rate of inflation hit a much lower than expected 3.2% last month, according to official figures which should lock in an interest rate cut by the Bank of England on Thursday.

The Office for National Statistics (ONS) reported an easing in the pace of the main consumer prices index measure from the 3.6% annual rate seen in October.

The main downwards pressure came from food costs amid a supermarket price war to secure custom ahead of the core Christmas season.

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ONS chief economist Grant Fitzner noted decreases in the prices paid for cakes, biscuits and breakfast cereals in particular.

"Tobacco prices also helped pull the rate down, with prices easing slightly this month after a large rise a year ago", he wrote.

"The fall in the price of women's clothing was another downward driver.

"The increase in the cost of goods leaving factories slowed, driven by lower food inflation, while the annual cost of raw materials for businesses continued to rise."

The data marked further downwards progress for the headline rate after a spike this year which economists have partly attributed to higher employment costs, imposed after the government's first budget, being passed on to consumers.

This price wave has muddied the waters over the pace of interest rate reductions by the Bank, which has wanted to see more evidence that inflation is not being further stoked by factors including strong wage growth.

It will be encouraged by better than expected slowdowns in other closely-watched inflation measures which strip out volatile elements, such as food and energy, as well as services inflation.

Recent data has also shown intensifying weakness in the labour market, with the unemployment rate surging by a percentage point to 5.1% since Labour took office.

Separate ONS figures have also found that the economy contracted for two consecutive months in the run-up to Rachel Reeves's second budget.

London Stock Exchange Group Data shows more than 90% of financial market participants are expecting the Bank to agree a rate cut to 3.75% - the lowest level in almost three years - from 4%.

The inflation data will come as a relief to the chancellor after a tough few months for her politically given the wider economic data and backlash over the Treasury's handling of the lead up to the budget.

Ms Reeves said: "I know families across Britain who are worried about bills will welcome this fall in inflation.

"Getting bills down is my top priority. That is why I froze rail fares and prescription fees and cut £150 off average energy bills at the budget this year.

"The Bank of England agree this will help cut prices and expect inflation to fall faster next year as a result."

(c) Sky News 2025: Sharp inflation slowdown leaves door to interest rate cut wide open