UK inflation fell sharply in November to 3.2%, down from 3.6% in October, and 0.2ppts below the Monetary Policy Committee’s (MPC) forecast. The inflation rate will probably rebound slightly in December, but we think today’s data means it’s now a no-brainer for the MPC to cut interest rates tomorrow. Looking ahead, inflation is set to slow sharply in the first few months of the new year as last year’s raft of regulated price and tax hikes fall out of the annual comparison, paving the way for another cut. What’s more, if the labour market continues to weaken at pace and growth remains subdued, then the MPC may be convinced to take rates even lower, probably to 3.25%.

Black Friday sales and lower food inflation dampen measure

Inflation fell sharply in November due to a broad-based easing in price pressures. The biggest driver was lower food inflation, which came in at 4.2%, well below the MPC’s expectation of 5%. Lower food inflation will comfort the MPC because there’s evidence to show that the cost of the weekly shop plays a big role in setting households’ inflation expectations.

Black Friday sales also helped. Clothing and footwear inflation dropped to -0.6% from 0.3%, with the ONS finding that discounting was more widespread this year. This was probably helped by an unusually warm November encouraging retailers to start discounting earlier. That said, we think pre-Budget nerves may also have hampered demand because household goods inflation fell, suggesting weak demand among discretionary items.

Inflation will likely rebound next month. Tobacco inflation slowed sharply in November to 4.2% from 7.7% in October. That’s because a later Autumn Budget this year means tobacco duty was increased a month later, giving a base effect, and will come in higher in December’s data. Black Friday sales winding down will also push up prices. However, inflationary pressures will take a step down early next year.

UK inflation to ease again in 2026

Last year’s smorgasbord of regulated price increases and tax hikes will drop out of the annual comparison as we head into 2026. The Chancellor’s cost-of-living measures − cutting electricity bills and freezing rail fares − will also kick in. This should leave inflation at around 2.5% by April.

The macroeconomic data flow has also been decidedly dovish over the last couple of weeks. Lower inflation, two months of contraction and a weakening labour market make it that much easier for the MPC to vote to cut interest rates tomorrow, especially knowing inflation has further to fall.

More importantly, the latest data increases the likelihood that the MPC will be convinced to cut twice next year instead of just once. Financial markets now think the chances are interest rates could head to 3.25% by the end of next year.

We think the MPC will want to see how much of the latest fall in inflation unwinds in December and whether the economy rebounds now the Budget is behind us. In any case, we think the risks to a further bank rate reduction favour a second cut, especially if easing food inflation calms the MPC’s nerves around inflation expectations.

All told, a downside surprise in inflation nails on a rate cut tomorrow. Inflation will probably rebound in December, but after November’s data it’ll still be below the MPC’s call for 3.5%. Further ahead, we continue to think the MPC will be one and done in 2026, leaving rates at 3.5%. However, the risks are shifting to the downside, which could mean rates fall to 3.25% if the UK economy’s recent weakness continues.

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