Keep knowledgeable with free updates
Merely signal as much as the UK inflation myFT Digest — delivered on to your inbox.
UK inflation unexpectedly slowed to 2.5 per cent in December, easing stress on chancellor Rachel Reeves and clearing the trail for the Financial institution of England to press forward with reducing rates of interest subsequent month.
Shopper value inflation was under November’s 2.6 per cent studying, pulled decrease by restaurant and resort costs. Analysts had anticipated inflation to carry regular final month.
Wednesday’s information will present some reduction for Reeves, who’s contending with increased borrowing prices fuelled by fears the UK financial system may very well be coming into a interval of stagflation, during which sluggish progress is accompanied by persistent value pressures.
However economists nonetheless anticipate inflation to reaccelerate within the months forward, notably on condition that December’s drop was pushed by unstable components resembling decrease airfares.
“There is still work to be done to help families across the country with the cost of living,” Reeves mentioned on Wednesday, as she insisted she would “fight every day” to ship progress and enhance residing requirements.
The current enhance in UK authorities borrowing prices, which final week hit a 16-year excessive, has threatened to blow a gap within the chancellor’s promise to steadiness day-to-day spending with tax receipts by 2029.
However Wednesday’s inflation information sparked a rally in UK gilts, pushing the 10-year yield down 0.08 share factors in early buying and selling to 4.81 per cent.
The pound strengthened following the discharge, rising 0.1 per cent to $1.222.
Zara Nokes, an analyst at JPMorgan Asset Administration, mentioned: “After a difficult start to the year, this morning’s inflation print will provide some relief to chancellor Reeves.”
She added {that a} stronger inflation determine may have been “a catalyst for further volatility in the gilt market”.
The report from the Workplace for Nationwide Statistics comes because the BoE’s Financial Coverage Committee prepares to carry its first assembly of 2025 subsequent month.
Following the information launch, merchants have been pricing in an 80 per cent likelihood of a quarter-point lower in February, in contrast with about 60 per cent beforehand, in keeping with ranges implied by swaps markets.
Rob Wooden, UK economist at Pantheon Macroeconomics, mentioned the below-consensus inflation determine gave the BoE a “window of opportunity to cut rates in February”.
Nevertheless, he described the determine as “temporary reprieve”, including that the steep drop in airfares was more likely to reverse in January.
Wednesday’s information confirmed that providers inflation, which is carefully watched by the BoE as a gauge of underlying value pressures, slowed sharply to 4.4 per cent from 5 per cent beforehand.
It was additionally under the 4.9 per cent studying anticipated by economists.
Core inflation, which excludes meals and power, dropped to three.2 per cent from 3.5 per cent.
The figures come as Reeves is underneath rising stress over the impression of choices she made in October’s Finances, together with rising employer nationwide insurance coverage contributions.
On Tuesday, the chancellor shrugged off requires her resignation, after her Conservative counterpart Mel Stride accused her of being a part of a “Shakespearean tragedy” amid the turmoil in bond markets.
Stride welcomed the inflation determine on Wednesday however warned there have been “still challenges ahead”, with the employer nationwide insurance coverage rise “yet to bite” and more likely to result in increased costs.
Liberal Democrat Treasury spokesperson Daisy Cooper mentioned the surprising fall in inflation supplied “a glimmer of hope, but the reality is the UK economy remains stuck in the mud”.
Progress was “nowhere to be found”, she added, after the federal government’s “damaging” enhance to employer nationwide insurance coverage.
Treasury chief secretary Darren Jones argued on Wednesday that the stress on Reeves over tumult within the markets was “unfair”, telling LBC that many points have been right down to “global movements in international markets” and noting that different international locations have been going through related challenges.
