On a certain date, the latest inflation data released by the UK Office for National Statistics showed that the UK's inflation rate in a certain month rose by 10.1% year-on-year, down 0.2 percentage points from the previous month and below market expectations of 10.3%, marking a new low in over 40 years; core inflation rose by 6.2% year-on-year, down 0.4 percentage points from the previous month. For the first time since August 2022, UK inflation has fallen back below 10%. Li Yingting, a researcher at the Institute of International Finance of the Bank of China, believes that market expectations for a UK central bank rate cut have increased.

The reasons for the significant decline in UK inflation in May include a sharp drop in airfare and gasoline prices, as well as a notable slowdown in service sector inflation. Commodity prices remain the main factor driving the decline in inflation. In May, UK commodity prices continued the previous downward trend,同比下降.%，with the decrease widening by . percentage points compared to April. Among them, prices for clothing and footwear increased by .% year-on-year, with the growth rate slowing by . percentage points compared to April. Prices for household goods such as furniture decreased by .% year-on-year, but prices for food and non-alcoholic beverages increased by .% year-on-year, rising by . percentage points compared to April.

UK service prices rose by 6.1% year-on-year in September, a decrease of 0.3 percentage points from August, which somewhat alleviated concerns about the stubbornness of service inflation. Among them, the price increases in cultural entertainment, education, and hotel and catering services all decreased compared to August. Due to significant declines in airfare and motor fuel prices, UK transportation prices saw a substantial year-on-year decrease of 3.4% in September, a key factor in the slowdown of service inflation.

High base effect and softening labor market drive the continuous decline of UK inflation. The UK's price index based on annual prices reached above in a certain year, forming a high base effect. Since then, international energy prices have declined, although energy shortages and other issues have not been completely resolved, there have been no new large-scale shocks. The UK price index has fluctuated slightly around this level, allowing the inflation rate to gradually return to the central bank's inflation target of %. Meanwhile, the growth of UK wages has slowed down. According to labor market data released by the UK Office for National Statistics, the real wage growth adjusted for inflation from May to July increased by .% year-on-year, a decrease of . percentage points compared to the growth from February to April, which to some extent alleviated market concerns about a wage-price spiral.

The softening labor market reflects a weakening of the UK's supply-side growth momentum. In November, the UK's manufacturing and service sectors were at 46.4% and 50.8% respectively, both above the boom-bust line but down by 1.0 and 0.6 percentage points from October. The supply-side weakness may spread to the demand side. In November, prices of necessities such as food and non-alcoholic beverages continued to rise, further increasing the cost of living for residents and leaving the UK still facing the risk of recurring inflation.

UK Inflation Falls Back to Central Bank Target Range, Providing More Room for Monetary and Fiscal Policies. Firstly, the decline in inflation provides a prerequisite for the Bank of England to cut interest rates. After the monthly inflation data was released, the market generally expects the Bank of England to make consecutive small rate cuts. The probability of a 25 basis point cut in December exceeds 50%, and the likelihood of a further 25 basis point cut in January is also high. It is expected that the benchmark interest rate could fall to 4.25% by the end of the year. Secondly, the decline in inflation has alleviated the fiscal pressure on the UK government to some extent. As UK inflation continues to fall, the government's expenditure on welfare linked to inflation is expected to decrease. At the same time, the Bank of England's rate cuts will reduce government interest expenses, allowing the UK government to have more fiscal policy space to achieve goals such as ensuring household incomes, improving public service levels, and increasing infrastructure investment.