The US central bank has announced an interest rate cut, just hours before the Bank of England is tipped to refrain from following suit.

The Federal Reserve cut its main funding rate by a quarter point to a new target range of 4.25%-4.5%, as markets had expected, but signalled that future reductions would happen more slowly.

A resurgence in the pace of inflation is a big worry, with the prospect of new trade tariffs under Donald Trump from 20 January also risking a leap in the pace of US price growth in the New Year as imported goods would cost more.

Money latest: Most pension credit claims made recently have been denied

Data on Tuesday showed resilient consumer spending among other reasons for Fed policymakers to be wary of inflation ahead.

The Federal Open Markets Committee expected two rate cuts in 2025. Market expectations had been for four just weeks ago, in line with the Fed’s September guidance.

Fed chair Jay Powell told reporters solid growth, improved employment and progress in the battle against inflation meant the central bank was in a “good place”.

But he acknowledged that “policy uncertainty” relating to the incoming Trump administration was a concern for the inflation outlook among some of the committee’s membership.

“We just don’t know very much at all about the actual policies, so it’s very premature to try and make any conclusion”, he added.

Government bond yields, which reflect perceived future interest rate paths, ticked upwards.

The dollar found support, gaining 0.5% against both the pound and euro, while major US stock markets retreated.

The Fed’s rate decision was announced just hours before the Bank of England gives its own rate verdict.

No cut is expected while financial markets are expecting a similar message on the possible interest rate path ahead.

UK yields – the effective cost of servicing government debt – have moved sharply higher this month, with the gap between British and German 10-year bond yields rising to its highest level in 34 years earlier on Wednesday.

It reflects the diverging interest rate outlooks for the Bank of England and European Central Bank, which has been cutting rates consistently to boost the euro area’s economy.

The UK’s problem is that the paces for both wage and price growth have accelerated.

At the same time, economic growth has stalled.

The scenario presents the Bank with a particular challenge.

Its governor Andrew Bailey has admitted that the budget’s effect on businesses is casting the biggest question mark over the future rate path.

Worries include the extent to which firms seek to recover costs from tax hikes and minimum pay rises in the form of price rises.

On the other hand, the pressure on wage growth could be eased if firms carry out their threat to limit pay growth as a result of the budget burden.

As it stands, UK borrowing costs look set to be higher for longer, hampering the economy as they are designed to do but also driving up the government’s bill to service its debts.

While the Bank is widely expected to hold off on a cut on Thursday, financial market forecasts for a reduction in February, seen as nailed on just weeks ago, are now running at just 50% in the wake of the latest wage and inflation data.

Just two rate cuts are priced in for 2025 currently.

What the Bank has to say about the price pressures it is currently seeing will be closely scrutinised.

Commenting on the US outlook Matthew Morgan, head of fixed income at Jupiter Asset Management, said: “As it stands, the market expects only two further cuts in the whole of 2025. This is perhaps not surprising given consumer spending, policy uncertainty (particularly around tariffs) and jobs looking in decent health.

“However, we think we are likely to see [US] rate cut expectations increase next year as growth softens. The labour market is clearly cooling, inflation is softening, and Europe and China are a drag on global growth.

“Given the high inflation of the Biden presidency was very unpopular with the public, we think Trump will be wary of overdoing inflationary policies, like tariffs. Together with potential government spending cuts in the US, next year could well see positive conditions for the performance of government bonds.”

English rent prices have reached another record high, growing by close to 10% in the past year, official figures show.

The typical private rental price in England rose 9.3% in the year up to November, costing £116 more than 12 months earlier, according to the Office for National Statistics (ONS).

English renters paid an average of £1,362 last month – a steep increase from the 8.8% hike seen a month earlier.

UK rent rises were not far behind, growing 9.1% across the year, just below the record-high annual rise of 9.2% in March.

Money blog: Big shoe retailer blames budget for closures

Londoners saw the biggest rent raises. In the capital, rent bills were up 11.6%, bypassing the previous record high.

Cheaper housing could be found in Scotland and Wales during the period. Their mean monthly rents were £980, up 6.5% and £772, 8.0% higher respectively.

Data for Northern Ireland is only available up to September, during which period rents rose 9%.

Analysis by Sky News found most people in the UK were renters and mortgage holders were in the minority.

Rent increasing disproportionately

Rent increases far surpass house price rises, mortgage rates and the overall rate of inflation.

People remortgaging at the end of November could secure a typical five-year fixed deal for 5.28% or a two-year fixed deal for 5.52%.

Meanwhile, the consumer price index measure of inflation stood at 2.6%.

Also published on Wednesday were average house prices, which were far below rent increases.

Average UK house prices rose 3.4% in the year to October 2024. In England, house prices are up 3%, in Wales 4% and in Scotland 5.5%, the ONS said.

Why are prices rising?

The increase comes due to there being more renters than rental properties available, the National Residential Landlords Association (NRLA) said.

“The biggest pressure on rents remains a chronic shortage of housing to meet demand,” NLRA’s policy director Chris Norris said.

“According to Savills up to one million new homes to rent will be needed by 2031 to meet growing demand. Despite this, government data shows that one in three landlords are now planning to sell properties they rent out over the next two years.”

London Renters Union has been contacted for comment.

Inflation has risen for the second month in a row to 2.6% in November.

Today’s percentage is above the Bank of England’s 2% target and marks an increase from October, when inflation climbed to 2.3% after three months of decline.

This is due to the higher cost of clothing, petrol and diesel, compared to last year, the ONS said.

But how does all of this affect the cost of groceries, clothing and leisure activities? Use our calculator to find out.

Which prices are increasing fastest?

Olive oil was the item with the largest price increase, with prices for 500ml to one litre rising from £7.22 to £9.21, an increase of 28%.

Olive oil has consistently had high price increases and experts have put that price rise down primarily to poor olive yields due to last year’s heatwaves in southern Europe.

However, they expect a significantly better harvest in the 2024-25 season, thanks to significant rainfall in Spain. The harvest could be double the size of last year’s, which may lead to lower prices in the coming months.

With Christmas fast approaching, many festive staples are seeing price increases, with carrots and potatoes up by nearly a fifth. On the drinks front, a 70cl bottle of cream liqueur has risen by 4%, but there’s good news for Champagne lovers with a bottle now costing 0.5% less.

Food and drink products are responsible for seven of the 10 biggest increases since last year.

Of non-food items, hair gel increased the most, by a fifth from £3.33 to £4.11.

Top five price rises:

• Olive oil (500ml-1litre): up 28%, £7.22 to £9.21
• Iceberg lettuce (each): up 24%, 80p to 99p
• Hair gel (150-200ml): up 23%, £3.33 to £4.11
• Hand rolling tobacco pack (30g): up 22%, £20.46 to £24.97
• Plums (per kg): up 20%, £2.91 to £3.48

Overall, 50 of the 156 types of food and drink tracked by the ONS have actually become cheaper since last year.

Crumpet lovers have reason to celebrate-prices for a pack of 6-9 crumpets have dropped by 8%, along with some dairy-free spread to top them with.

Overall, 142 out of the 444 products in our database are cheaper than they were 12 months ago.

Top food price decreases:

• Pulses (390-420g): down 12%, 76p to 67p
• Frozen prawns (per kg): down 9%, £18.87 to £17.20
• Canned tomatoes (390-400g): down 8%, 72p to 66p
• Dairy free spread/margarine (450-500g): down 8%, £2.17 to £1.99
• Crumpets (pack of 6-9): down 8%, £1.00 to 92p

Of non-supermarket items, kerosene has been the biggest price faller – by a more than a fifth.

What is the effect of long-term inflation?

The price changes described above compare the cost of items to where they were a year ago.

However, inflation has now been at high levels for an extended period of time.

The war in Ukraine, COVID, Brexit, and other supply chain pressures have all contributed to spiralling costs in recent years.

Inflation reached a 40-year high of 11.1% in October 2022.

Follow Sky News on WhatsApp

Keep up with all the latest news from the UK and around the world by following Sky News

Tap here

While the headline inflation figure has come down markedly, any amount of inflation means that prices are still rising, and building on already inflated costs.

We’ve compared the costs of shopping items with what they were three years ago to see what the cumulative impact of inflation has been.

The biggest price rise for groceries over that time has been for olive oil (500ml to one litre), which has increased nearly two-and-a-half times (146%), from £3.74 to £9.21 in the past three years.

Iceberg lettuce is up by four-fifths, with one costing 99p now compared with 54p in October 2021.

Use our calculator to see how much prices in your shopping basket have risen in total since three years ago.

Who is worst affected?

Richard Lim, chief executive of Retail Economics, says: “It’s the least affluent households that are going to see much higher rates of inflation as they spend more of their income on food and energy.”

We’ll continue to update our spending calculator over the coming months so you can see how you’ll be affected.

Follow the Daily podcast on Apple Podcasts,  Google Podcasts,  Spotify, Speaker

Methodology

The ONS collects these prices by visiting thousands of shops across the country and noting down the prices of specific items. There are upwards of 100,000 prices published every month, from more than 600 products.

The items that form the “official shopping basket” change each year to reflect how the purchasing habits of the population have changed. For example in March 2021, after a year of the pandemic, hand gel, loungewear bottoms and dumbbells were added, while canteen-bought sandwiches were among the items removed.

Where there aren’t the exact equivalent items available at a survey shop, ONS officials pick the best alternative and note that they’ve done this so it’s weighted correctly when the averages are worked out.

Shops are weighted as well, so the price in a major chain supermarket will have a greater impact on the average than an independent corner shop.

We will be updating these figures each month while the cost of living crisis continues.

During the pandemic, more of the survey was carried out over the phone and work is ongoing to digitise the system to be able to take in more price points by getting data from supermarket receipts, rather than making personal visits.

Data journalists: Daniel Dunford, Amy Borrett, Ben van der Merwe, Joely Santa Cruz and Saywah Mahmood
Interactive: Ganesh Rao
Design: Phoebe Rowe, Brian Gillingham

The Data and Forensics team is a multi-skilled unit dedicated to providing transparent journalism from Sky News. We gather, analyse and visualise data to tell data-driven stories. We combine traditional reporting skills with advanced analysis of satellite images, social media and other open-source information. Through multimedia storytelling, we aim to better explain the world while also showing how our journalism is done.