Sink in UK inflation tolls recession bell

UK inflation printed 0.4% lower in November than the previous month, the biggest single drop since September 2024. Moreover, this release marks the second consecutive drop, at the same time that the economy has failed to print a growth figure above 0% since July (MoM).

Clearly, this is a continuation of a theme of weakening consumer spending and growth, despite the markets very low expectations for cuts next year, which have only just changed to price in nearly 2 cuts next year. This remains much too low given the reality of the situation in the UK.

Food and clothing saw among the largest drops in prices at this morning’s reading, two very consumer sensitive areas, a recession could be on the cards very soon. This still doesn’t seem to be being priced into the rates market, a shallow recession, climbing unemployment and falling inflation would likely be the perfect storm to precipitate a swift slashing of rates.

This should all read as foreboding for the Pound, which I feel has long lived on ignorance of just how poor the outlook really is, and the weakness of peers such as the Dollar.

A cut from the Bank of England tomorrow is as close to certain as you can get in this game and I would expect a dovish statement to follow, likely a tacit suggestion that the Bank is back in ‘cutting mode’.

A considerable depreciation in the Pound seems likely to follow, especially given the fact that the UK has breached the 5% unemployment level with a 5.1% joblessness rate. The government's recent change to employment laws, reducing the period of employment needed for an employee to be able to sue for wrongful dismissal from 2 years to 6 months seems likely to accelerate this weakening in the jobs market.

Overall, it seems tough to find a ray of light in the UK, or indeed the Pound’s, outlook into next year.