Inflation dropped by more than expected to 3.2 per cent in the year to November, according to figures published by the Office for National Statistics (ONS) on Wednesday.
Although the Consumer Prices Index (CPI) remains well above the Bank of England’s (BoE) 2 per cent target, it dropped from October’s reading of 3.6 per cent.
The Bank has already signalled that it believes inflation has “peaked” yet on Thursday we will find out if its Monetary Policy Committee (MPC) dropped interest rates from 4 per cent to 3.75 per cent, as many experts believe it will.
Most economists had expected inflation would fall to around 3.4 per cent, so the reduction is bigger than expected.
The rate of 3.2 per cent is the lowest inflation has been for eight months.
The figures will offer Chancellor Rachel Reeves a rare piece of positive economic news just weeks after she delivered the Budget.
What will happen to inflation in the future?
Most economists now expect inflation to begin a steady decline.
Stephen Barber, professor of global affairs at the University of East London, told The i Paper: “While not as quick as policymakers had hoped, inflation has fallen sharply since the double digit levels of a couple of years back.
“This latest fall perhaps confirms expectations that it will continue this trend through 2026.”
Deutsche Bank believes inflation will come down as a result of lower energy prices.
Sanjay Raja, chief UK economist at Deutsche Bank, said: “We see headline CPI dropping to around 3 per cent year on year at the start of 2026, and pulling lower to 2.2 per cent later next year.”
The Bank of England however forecasts that inflation will remain above the 2 per cent target until 2027.
James Moberly, a UK economist at Goldman Sachs, previously said food inflation was expected to fall slightly after a British Retail Consortium survey showed prices were rising at a slower pace than expected.
He added that the annual increase in university fees would contribute to keeping inflation levels relatively high.
What does changing inflation mean for interest rates?
When inflation stays high, prices rise more quickly, increasing the likelihood that the Bank will keep interest rates elevated for longer.
It is, however, considered that interest rates will be cut by 0.25 percentage points in December.
Robert Wood, chief UK economist at Pantheon Macroeconomics, said he is “confident” there will be a rate cut on 18 December, though he acknowledged he is less certain about the Monetary Policy Committee’s approach beyond that point.
Robert Salter, director of Block Rothenberg, shares this view and anticipates a 0.25 percentage point cut to 3.75 per cent.
A cut would provide some welcome relief to Reeves and Sir Keir Starmer, as it would lower housing costs for millions of households.
What does this mean for mortgages?
While mortgages are not directly determined by inflation, many products are influenced by the Bank’s base rate, which in turn is shaped by inflation.
Tracker mortgages and standard variable rates move directly with interest rate changes, while fixed-rate deals tend to follow swap rates, which reflect long-term expectations for the base rate.
Mortgage rates are broadly expected to fall as we move into 2026, particularly if the Bank delivers a cut at its next meeting.
Rates are already falling with two year fixed rates of around 3.5 per cent available for those with the highest deposits or equity.
Lower interest rates generally lead to cheaper mortgages. However, the impact will not be immediate. As Mr Salter noted: “A drop in the official rate of interest may help mortgage holders in due course, as most mortgages are reasonably long-term fixed rate agreements.”
What about savings?
High inflation is bad news for savers as it erodes the value of money held in the bank. Therefore, the lower the rate, the better the news for savers.
The effects of inflation on the Bank’s interest rate also impact savers, because of the base rate’s influence on savings rates. Savings rates have dropped in recent months, though it is possible to bag a deal that beats inflation.
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For example, Chase pays 4.5 per cent to new customers, with a one-year 2 per cent fixed bonus on top of its 2.5 per cent variable rate. This is app-only and you only need to deposit £1.
Mr Salter said a 0.25 percentage point cut next month “would probably be unwelcome to many savers, as banks and building societies will inevitably reduce the rates they pay on people’s savings to mirror such a change”.
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