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UK inflation unexpectedly slowed to 2.5 per cent in December as the economy weakened, easing pressure on chancellor Rachel Reeves and clearing the path for the Bank of England to press ahead with cutting interest rates.
The consumer price index figure was below November’s 2.6 per cent reading. Analysts had expected inflation to hold steady last month.
The data will provide some relief for Reeves, who is contending with higher borrowing costs that have been fuelled by fears the UK economy could be entering a period of stagflation.
The report, from the Office for National Statistics, comes as the BoE’s Monetary Policy Committee prepares to hold its first meeting of 2025 next month. Investors are betting that the central bank will cut rates by a quarter-point to 4.5 per cent.
Tomasz Wieladek, chief European economist at T Rowe Price, said the data was a “clear green light for another series of cuts”.
The BoE has estimated that the economy stagnated in the final quarter of 2024. Business surveys point to weaker confidence and hiring, which could curb inflationary pressures.
“There is still work to be done to help families across the country with the cost of living,” Reeves said on Wednesday. “That’s why the government has taken action to protect working people’s payslips from higher taxes, frozen fuel duty and boosted the national minimum wage.”
Wednesday’s data showed that services inflation, which is closely watched by the BoE as a gauge of underlying price pressures, slowed sharply to 4.4 per cent from 5 per cent previously. The services inflation reading was sharply below the 4.9 per cent reading expected by economists.
Core inflation, which excludes food and energy, dropped to 3.2 per cent from 3.5 per cent.
The pound weakened slightly after the data release, down 0.3 per cent on the day at $1.218. Traders in swaps markets had attributed a 60 per cent chance to a quarter-point cut next month, according to levels before the data was released.
Zara Nokes, an analyst at JPMorgan Asset Management, said: “After a difficult start to the year, this morning’s inflation print will provide some relief to chancellor Reeves. A sticky print could have been a catalyst for further volatility in the gilt market.”
The central bank cut its key rate to 4.75 per cent in two quarter-point moves last year.
Additional reporting by Ian Smith
