UK inflation surged to its highest point in eight months in November, signaling that the Bank of England is unlikely to lower borrowing costs in the immediate future.
According to the latest data from the Office for National Statistics, consumer price inflation rose by 2.6% in the year to November, a noticeable increase from 2.3% in October. The rise was primarily driven by persistent inflation in the services sector, which constitutes around 80% of the UK economy, along with higher fuel prices.
This uptick in inflation, which diverged further from the Bank of England’s 2% target, aligns with market forecasts but reinforces the view that rate cuts are off the table for now.
Economists now rule out any immediate interest rate reductions following the central bank’s meeting on Thursday. This latest inflation data, the sharpest rise since March, underscores the challenges facing policymakers in curbing price pressures in the services sector.
James Smith, research director at the Resolution Foundation, noted that the data highlights the ongoing difficulty the UK faces in bringing inflation down. While rate cuts had been anticipated earlier this year, after inflation fell to its lowest levels since 2021 in September, the most recent rise has reshaped expectations.
Despite inflation moderating from its peaks during the pandemic, it remains well above the Bank of England’s target. Central banks have gradually reduced borrowing costs from the near-zero levels seen during the height of the pandemic, when supply chain disruptions and the war in Ukraine led to soaring energy prices.
Globally, inflation has retreated from multidecade highs, and central banks, including the Bank of England, are signaling a shift away from ultra-low interest rates. However, economists don’t foresee rates returning to the record lows of the post-2008 era anytime soon.
Expectations of aggressive rate cuts next year have now been tempered, largely due to persistently high wages and inflationary pressures in services. As a result, the outlook for interest rates remains uncertain.
Critics argue that the UK government’s fiscal policy, particularly the October budget, could exacerbate inflation. The budget, which plans to finance increased public spending through higher business taxes and borrowing, may lead to price hikes as businesses adjust to higher costs. Economists warn that this could keep inflationary pressures elevated in the near term.
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