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British inflation unexpectedly slowed to 2.5 percent in December as the economy weakened, easing pressure on Chancellor Rachel Reeves and paving the way for the Bank of England to continue cutting rates of interest.
The consumer price index figure was lower than November’s figure of 2.6 percent. Analysts expected inflation to remain stable last month.
The data will provide some relief to Reeves, who is facing higher borrowing costs fueled by fears that the UK economy is entering a period of stagflation.
The Office for National Statistics report 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 percent.
Tomasz Wieladek, chief European economist at T Rowe Price, said the data was a “clear green light for another round of cuts”.
The BoE estimates that the economy stagnated in the last quarter of 2024. Business surveys point to a decline in confidence and hiring, which could curb inflationary pressures.
“There is still work to be done to help families across the country cope with the cost of living,” Reeves said Wednesday. “That’s why the government has taken steps to protect workers’ pay slips from tax hikes, frozen fuel taxes and increased the national minimum wage.”
Data on Wednesday showed that services inflation, which is closely monitored by the BoE as a gauge of underlying price pressures, slowed sharply to 4.4 percent from 5 percent previously. The services inflation figure was significantly lower than the 4.9 percent figure economists had expected.
Core inflation, which excludes food and energy, fell to 3.2 percent from 3.5 percent.
Sterling weakened slightly after the data release, down 0.3 percent on the day to $1.218. Traders in swaps markets had assigned a 60 percent chance of a quarter-point decline next month, based on levels before the data was released.
Zara Nokes, analyst at JPMorgan Asset Management, said: “After a difficult start to the year, this morning’s inflation figures will provide some relief for Chancellor Reeves. Sticky printing could have been a catalyst for greater volatility in the government securities market.
The central bank cut its key rate to 4.75 percent last year in two quarter-point moves.
Additional reporting by Ian Smith
