Inflation in the U.K. fell to its lowest in over two years in November, fanning the flames of speculation that the Bank of England will be start cutting interest rates relatively early next year.

The Office for National Statistics said its consumer price index fell 0.2 percent from October, rather than rising 0.2 percent as economists had expected ahead of time. Underlying inflation, which strips out volatile food and energy prices, fell even more sharply, by 0.3 percent. That brought the headline annual rate down to 3.9 percent, down from 4.6 percent in October.

The figures bring relief into view for millions of hard-pressed consumers, who have had to cope with increased mortgage and credit costs as well as the knee-jerk price rises that companies passed on over the last two years.

With average wage growth still running at an annual rate close to 7 percent, real incomes (i.e. adjusted for inflation) are now clearly growing again, restoring some of the purchasing power that has been lost since 2021.

While the headline rate is still nearly double the Bank of England's medium-term target of 2 percent, it represents remarkable progress from a peak of over 11 percent a year ago. While much of the decline was due to fuel prices coming down, the ONS noted easing price pressures more or less across the board, even in areas where consumers had until recently been happy to spend freely.

Inflation for recreational and cultural goods such as computer games and concert tickets slowed to an eight-month low, while the fall in seasonal items such as airfares was much sharper than a year ago, when consumers still had pandemic-era savings and pent-up desire to travel.

“The power of consumer rebellion is strong,” said UBS Global Wealth Management chief economist Paul Donovan in a morning note. U.K. consumers “seem to have realized that profit-led inflation is indeed a thing, and their unwillingness to accept that any more has had companies scrambling to shore up customer loyalty with price discounts.”

Chancellor Jeremy Hunt — Rishi Sunak's top finance minister in the governing Conservative Party — made optimistic noises too. "With inflationary pressures easing, alongside the major business tax cuts I announced in the autumn statement, we are back on the path to healthy sustainable growth," he said in a statement.

In the short-term, at least, the picture may be even brighter than the headline numbers suggest. Donovan pointed out that food inflation, at 9.1 percent on the year according to the ONS, is still probably overstated because the ONS doesn’t take account of big supermarkets’ two-tier price schemes. Barclays analysts Jack Meaning and Abbas Khan pointed out that services inflation, a key concern of BoE policymakers, is now 0.6 percentage points below the Bank’s most recent forecasts.

Financial markets reacted enthusiastically to the news, pushing the benchmark FTSE 100 stock index up over 1.3 percent to its highest since May, the best performing market in Europe, while the pound fell half a percent against both the euro and the dollar in anticipation of earlier interest rate cuts.

The yield on the two-year gilt, the reference rate for the most popular fixed-rate mortgage in the U.K., plummeted 0.15 percent to a seven-month low of 4.14 percent.

The news reinforced a positive trend across all European markets, corroborating the growing belief that disinflation is now firmly entrenched and that both the BoE and European Central Bank will cut rates in the first half of next year. U.K. interest rate futures now imply that the BoE will start cutting in the first quarter, and will cut the Bank Rate by around 1.5 percentage points over the course of 2024.

This story has been updated with further reporting.