Market News

BY Eir Nolsoe

It was the news Rachel Reeves and Andrew Bailey had been waiting for – albeit for different reasons.

A much bigger-than-expected fall in inflation just after the Budget is an early Christmas present for Reeves. She can tell voters she is doing something about the punishing cost of living.

For the Bank of England, a slowdown in price rises from 3.6pc in October to 3.2pc in the 12 months to November is also welcome. It means progress is being made on getting back to its 2pc target.

But officials at Threadneedle Street are likely to take a gloomy view of exactly why inflation is slowing. Far from crediting the Chancellor with targeted action to slow price rises, many economists see the data as yet another signal that Britain is heading for recession.

The signs are now everywhere: rising unemployment, a shrinking economy and rapidly falling consumer price rises.

“The pain point for the UK economy may now be weakening demand, rather than higher prices,” concludes Adam Deasy, economist at PwC.

The UK’s inflation rate has fallen to the lowest level since March, the latest figures from the Office for National Statistics show. It is the final and most important data point ahead of the Bank of England’s interest rate decision on Thursday.

While it paves the way for a festive rate cut, the reasons why inflation is slowing are worrying. A closer look at the data reveals a surprise fall in food price rises ahead of Christmas, for example.

Grant Fitzner, the chief economist at the ONS, says: “Lower food prices, which traditionally rise at this time of the year, were the main driver of the fall with decreases seen, particularly for cakes, biscuits and breakfast cereals.”

Dairy products and foods such as sugar, jam, syrups, chocolate and confectionery also helped pull down prices.

Overall, food prices were still 4.2pc higher than a year ago in November, though it marks a sharp fall from 4.9pc in October.

“While high labour and commodity costs have pushed up food inflation over 2025, bigger promotions ahead of Christmas helped to bring this figure down,” says Kris Hamer, at the British Retail Consortium.

Fitzner, who said inflation was falling “notably”, also highlighted that other items were getting cheaper even as the costs faced by businesses are still rising.

He said: “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.”

Many products either rose in price more slowly or became outright cheaper in the run-up to Christmas. This is highly unusual.