Commentary: UK inflation falls sharply

UK inflation has fallen to 3.9% – its lowest level for more than two years, driven largely by a drop in fuel prices; this is down from 4.6% in October

 
Slowing price rises for food, including staples such as pasta, milk and butter, were also behind the fall, although November’s rate is still almost double the Bank of England’s 2% target.

Grant Fitzner, chief economist at the Office for National Statistics (ONS), said that while UK inflation had eased again, “prices remain substantially above” what they were before Russia’s invasion of Ukraine, which caused global oil prices to soar, pushing petrol and diesel prices to record levels.

Oil prices have since fallen back and pump prices are now at their lowest level for more than two years, with a litre of unleaded £1.43 on average, a price last seen at UK forecourts in October 2021.

As well as fuel, Mr Fitzner said there was a “a price drop for a range of household goods and the cost of second-hand cars”, which contributed to the lower inflation rate.”Food prices also pulled down inflation, as they rose much more slowly than this time last year,” he added.

“It remains vital no one forgets that whilst inflation is falling it doesn’t mean prices are falling, and that not everyone has had an inflation busting wage increase over the past couple of years,” said Danni Hewson, head of financial analysis at AJ Bell.”Some families will be dreading this Christmas, feeling guilty about the presents they’ve been able to afford or worried about paying off debts they’ve racked up just to afford the basic festive treats,” she added.

Most economists had expected UK inflation to fall to 4.3% last month; the last time inflation in the UK was lower than 3.9% was in September 2021 when it was 3.1%.

While the cost of living has started to ease, many households will not feel better off, especially when it comes to energy bills and borrowing costs; most households will actually pay more for energy this winter than in 2022 because government support for bills is no longer in place.

The Bank of England has hiked interest rates 14 times since December 2021 to try to slow price rises; rates are now 5.25%, a 15-year high, leading to higher borrowing costs for mortgages, and governor Andrew Bailey has ruled out cutting rates anytime soon, despite weakening economic growth.

Chancellor Jeremy Hunt said the latest inflation figures set the UK “back on the path to healthy, sustainable [economic] growth”, but that the government would “continue to prioritise measures that help with cost of living pressures”.

But Rachel Reeves, Labour’s shadow chancellor, said “prices are still going up in the shops, household bills are rising and more than a million people face higher mortgage payments next year after the Conservatives crashed the economy”.

UK inflation remains higher than in other countries including the US and Germany but the gap is narrowing; November’s fall puts the UK on a level footing with France, but ahead of the EU’s average rate of 3.1% and the US’s 2.1%.
 

Here are some comments from the world of personal finance:
 

Lily Megson, Policy Director at My Pension Expert, said: “Inflation continues to head in the right direction as year-end approaches. However, the cost-of-living crisis has plagued budgets throughout 2023 – household finances are unlikely to bounce back immediately.

“The same will be the case for pension planners. Particularly in the run up to the new year, many Britons will be reconsidering their retirement finances and trying to plan for the future. A challenge to say the least, given the unpredictability of the UK’s economic performance.

“It is therefore vital that the government step up and take the strongest measures to support individuals on their financial journey, particularly by addressing broader cost-of-living challenges. In 2024, the emphasis should be on boosting pension engagement, increasing access to financial advice, and promoting effective financial planning, ensuring all savers can navigate complexities with confidence.”
 
Ben Thompson, Deputy CEO at Mortgage Advice Bureau says the market has some festive cheer and it’s hoped this will continue into 2024.

“The good news of a third consecutive base rate pause has already led to lenders cutting rates, and November’s inflation reading is another present for policymakers. However, it’s not all Celebrations and Baileys at the Bank of England. Inflation remains above the 2% target, and as the minutes from last week’s interest rate decision revealed, rates will likely need to stay higher for a while yet to shake out any lingering inflation.

“For those looking to buy or remortgage in the near future, it remains as crucial as ever to seek advice. The market has some festive cheer right now, with more competitive deals available. This should set the tone for 2024, with lenders gaining confidence as the year progresses, and the prospect of a base rate cut appearing on the horizon. As the festivities draw ever closer, this could be the first time that the light at the end of the tunnel has come into sight. However, it remains to be seen just how quickly we get there.”
 

Andy Mielczarek, Founder and CEO of SmartSave, a Chetwood Financial company, said: “The signs are that the battle against inflation is slowly being won. People will breathe a sigh of relief this Christmas as a result, grateful for a little respite from the cost-of-living crisis. But it is in January – when people’s financial planning tends to come into sharper focus – that we are likely to see the combination of falling inflation and steady interest rates truly take effect.

“For much of the past two years, money in savings accounts was losing value in real terms due to increasing inflation. Now, the situation has been reversed, with inflation falling below the base rate, affording those keen to save or invest their money the opportunity to reconfigure their financial strategies.

“But timing is everything, with a chance the base rate will fall in 2024. Moreover, seeking out the best returns requires people to carefully consider the products and providers they go with – many banks are still failing customers with paltry returns, so once the Christmas shopping is finished, it’s important people shop around for the best options to make their savings work harder for them.”
 
Mohsin Rashid, CEO of ZIPZERO, said: “Today’s figures provide much-welcomed comfort that inflation is headed in the right direction. That does not mean, however, that all is merry. The cost-of-living crisis will still be casting a nasty shadow over people’s Christmases, and undoubtedly stockings will shrink as millions reel from the aftermath of two years of financial hardship, driven by rising interest rates and sky-high inflation.

“The one gift Britons still need this Christmas is support. Support from the Government in the form of longer-term financial aid and relief packages in 2024, and support from retailers to keep prices affordable in the New Year.”