A 17-month-long run of falling shop inflation has come to an end, which has further dampened hopes of another interest rate cut from the Bank of England before the end of the year.
Shop prices are now 0.6% cheaper than a year ago but have risen from October’s 0.8% – the first time in 17 months that inflation has been higher than the previous month, according to the British Retail Consortium (BRC).
Prices for fresh food were 1.2% higher than last November, driven by items such as seafood and tea.
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BRC chief executive Helen Dickinson said: “November was the first time in 17 months that shop price inflation has been higher than the previous month, albeit remaining overall in negative territory.
“With significant price pressures on the horizon, November’s figures may signal the end of falling inflation.”
When might interest rates fall further?
The jump in shop price inflation, on top of other factors, means another interest rate reduction in December at the Bank’s next Monetary Policy Committee meeting looks unlikely, based on market expectations. This means interest rates will probably end the year at 4.75%.
Market participants have dialled down their bets after watching the Budget play out. Chancellor Rachel Reeves announced £70bn in spending policies – an attempt to boost investment in the UK economy and prevent department cuts.
“The increases in government spending and investment announced in the Budget are taking place at a time when the economy is already operating close to capacity,” says Paul Dales, chief UK economist at the consultancy Capital Economics.
“In that situation, the faster rates of GDP growth we expect in light of the Budget will probably spill over into larger rises in prices than we previously thought,” he told MoneyWeek.
The team at Capital Economics was previously expecting inflation to average out at 2.6% in 2025 and 2% in 2026. They have now adjusted their inflation forecasts upwards slightly to 2.8% and 2.1% respectively.
Reeves also unveiled £40bn in tax hikes in her fiscal statement, with a large part of this coming from an increase to employer National Insurance contributions. Commentators have said this could contribute to higher inflation if businesses pass the costs on to consumers by putting their prices up.
The National Living Wage is also set to rise by 6.7% from April. This is good news for employees but will contribute to rising costs for some businesses. It could also contribute towards wage growth staying high. Wage growth is another driver of inflation.
Even before the Budget, onlookers were expecting less positive inflation figures towards the end of the year. In the latest poll from news agency Reuters, almost two-thirds of economists (46 out of 72) said they expect rates to be kept on hold at the meeting in December.
