In a significant development for the UK economy, the rate of inflation has slowed sharply, increasing the likelihood of an imminent interest rate reduction by the Bank of England.
Official Figures Show Surprise Slowdown
According to data released by the Office for National Statistics (ONS) on Wednesday 17 December 2025, the headline Consumer Prices Index (CPI) measure of inflation eased to 3.2% in the year to November. This represents a notable drop from the 3.6% annual rate recorded in October and came in much lower than economists had predicted.
The ONS identified several key factors behind the deceleration. A fierce supermarket price war, as retailers competed for customers in the crucial run-up to Christmas, was the primary downward force. Chief economist Grant Fitzner highlighted specific decreases in the cost of items like cakes, biscuits, and breakfast cereals.
Other contributing elements included a slight easing in tobacco prices, following a significant rise a year ago, and a fall in the price of women's clothing. Furthermore, the rate of increase in factory gate prices for goods slowed, driven by lower food inflation, though the annual cost of raw materials for businesses continued to climb.
Economic Context and Bank of England Decision
This latest data marks continued progress in bringing inflation down from a spike earlier in the year. That previous surge was partly attributed to businesses passing on higher employment costs, which followed the government's first budget, to consumers.
The persistence of these price pressures had complicated the Bank of England's timeline for interest rate reductions. The Monetary Policy Committee has been seeking clear evidence that inflation is being durably tamed and is not being reignited by strong wage growth.
However, recent economic indicators have shown a weakening labour market, with the unemployment rate jumping by a full percentage point to 5.1% since the Labour government took office. Separate ONS figures also revealed the economy contracted for two consecutive months ahead of Chancellor Rachel Reeves's second budget.
Market Expectations for Monetary Policy
The sharper-than-anticipated slowdown in inflation has solidified financial market expectations for immediate action from the central bank. Data from the London Stock Exchange Group indicates that more than 90% of market participants now anticipate the Bank's Monetary Policy Committee will agree to an interest rate cut when it meets on Thursday.
The expected move would see the base rate lowered from 4% to 3.75%, which would be its lowest level in almost three years. This decision is viewed as a critical step to support an economy showing signs of strain, provided the inflation trajectory remains favourable.
