UK inflation unexpectedly slows to 2.5% in December

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UK inflation unexpectedly slowed to 2.5 percent in December, easing pressure on Chancellor Rachel Reeves and paving the way for the Bank of England to cut interest rates.

The consumer price index was lower than the 2.6 percent reading in November, driven by restaurant and hotel prices.Analysts had expected inflation to hold last month.

The data will provide some relief to Reeves, who is grappling with higher borrowing costs fueled by fears that the UK economy could be entering a period of stagflation, when slow growth is accompanied by persistent price pressures.

The latest surge in UK government borrowing costs, which hit a 16-year high last week, threatens to blow a hole in the chancellor’s pledge to balance everyday spending with tax receipts by 2029.

“There is still work to be done to help families across the country with the cost of living,” Reeves said Wednesday, as he insisted he would “fight every day” to deliver growth and improve living standards.

“JPMorgan Asset Management” analyst Zara Nokes says. “After a difficult start to the year, this morning’s inflation print will provide some relief to Chancellor Reeves.”

He added that stronger inflation could have been “a catalyst for further volatility in the jewelery market”.

The report from: Office for National Statistics comes as the BoE’s monetary policy committee prepares to hold its first meeting of 2025 next month.

After the data was released, traders were buying a 75 percent chance of a quarter-point decline in February, compared with about 60 percent previously, based on levels assumed by swaps markets.

Tomasz Wieladek, chief European economist at T Rowe Price, said the data was “a clear green light for another round of cuts”.

It BoE: he estimated that the economy stagnated in the last quarter of 2024. Business surveys point to weaker confidence and hiring, which could curb inflationary pressures.

Wednesday’s data showed that services inflationwhich is closely watched by the BoE as a key gauge of price pressures, slowed sharply to 4.4 percent from 5 percent previously.

It was also below the 4.9 percent expected by economists.

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

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

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

The rise was “nowhere to be found”, he added, after the government’s “damaging” rise in employers’ national insurance.

Tory shadow chancellor Mel Stride welcomed the cut but warned there were “challenges still ahead” as the rise in employers’ national insurance was “still biting” and likely to lead to higher prices.

Additional reporting by Ian Smith