UK inflation unexpectedly slows to 2.5% in December

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UK inflation unexpectedly slowed to 2.5 per cent in December, easing pressure on Chancellor Rachel Reeves and paving the way for the Bank of England to press ahead with interest rate cuts.

The CPI number was lower than November’s reading of 2.6 percent, affected by lower restaurant and hotel prices. Analysts had expected inflation to stabilize last month.

The data will provide some relief to Reeves, who faces rising borrowing costs fueled by fears that the UK economy may enter a period of stagflation, as sluggish growth accompanies persistent price pressures.

The latest increase in UK government borrowing costs, which last week reached a 16-year high, threatened to blow a hole in the Chancellor’s promise to balance everyday spending with tax revenues in 2029.

“There is still work to do to help families across the country afford the cost of living,” Reeves said on Wednesday, insisting she would “fight every day” to achieve growth and improve living standards.

“After a difficult start to the year, this morning’s inflation reading will provide some relief to Chancellor Reeves,” said Zara Knox, an analyst at JP Morgan Asset Management.

She added that a stronger inflation figure could have been a “catalyst for more volatility in the gold market.”

Report from Office for National Statistics This comes as the Bank of England’s Monetary Policy Committee prepares to hold its first meeting of 2025 next month.

After the data was released, traders were calculating a 75 per cent chance of a quarter-point cut in February, compared with about 60 per cent before that, according to levels indicated by swap markets.

Thomas Willadek, chief European economist at T Rowe Price, said the data was a “clear green light for another series of cuts”.

the Bank of England It estimated that the economy will experience a recession in the last quarter of 2024. Business surveys indicate weak confidence and employment, which could dampen inflationary pressures.

Wednesday’s data showed that services Economic inflationwhich the Bank of England closely monitors as a measure of underlying price pressures, slowed sharply to 4.4 percent from 5 percent previously.

It was also lower than the 4.9 percent reading economists had expected.

Core inflation, which excludes food and energy, fell to 3.2 percent from 3.5 percent.

The British pound fell 0.2 percent to $1.219 after the data was released.

The Lib Dem Treasury spokeswoman, Daisy Cooper, said on Wednesday that the unexpected drop in inflation offered “a glimmer of hope but the reality is that the UK economy remains stuck in the mud.”

She added that growth was “nowhere to be found”, following the government’s “harmful” increase in National Insurance for employers.

Mel Stride, Tory shadow chancellor, welcomed the cut, but warned that “there are still challenges ahead”, with the rise in employers’ national insurance “not yet biting” and likely to push up prices.

Additional reporting by Ian Smith