Inflation in UK eased last month. Core price growth dropped to the lowest level. It was welcome news, according to official data. Market sell-off so Finance Minister Reeves will be delighted with this. In December, the annual inflation rate was 2.5%. It was 2.6% in November. This has been reported by Office for National Statistics (ONS). Economists had forecast it would stay the same.
Expectations for Inflation and Rate Cuts Ahead
Inflation may rise again. Higher energy prices will play a role. So will fast wage growth. The budget for October also contained temporary stimulus. Most analysts believe inflation won’t hit 3% before early 2025. Reeves said there is more work to be done. Investors bolstered bets on a Bank of England (BoE) cut. They assigned a 84% probability to first cut on February 6. There are two rate cuts fully priced in for 2025. This was also an increase from 60% ahead of the data.
Market Reaction and Bank of England
Yields on British government bonds fell. They were at multi-decade highs. The figures initially prompted a dip in sterling. It then reversed course. It was little changed more broadly. Britain’s inflation needs a gradual easing, the BoE said. This is even as the economy shows signs of slowing. Gradual rate cuts have raised borrowing costs. This put Reeves’ budget targets in jeopardy. She may need to reduce spending.
Analyst Commentary and ONS Data
In a way, what you should get is the dynamics of that.” Luke Bartholomew, of abrdn, added. He added that the report ought to reassure investors. The BoE can continue easing. The next rate cut, he believes, is perhaps in February. It had predicted 2.5% inflation in December. They projected just under 2.75% in the second half of 2025. Scott Gardner of Nutmeg said lawmakers and Treasury officials will breathe a sigh of relief.
Underlying Inflation and its Drivers
The drop in headline CPI was driven by lower hotel room rates and air fares. Clothing prices also fell. The price of tobacco increased less so than in 2023. ONS mentioned differences in collecting air fare data. This December featured return flights on both Christmas Eve and New Year’s Eve. These dates are not so popular for travel. Core inflation fell to 3.2%. It was 3.5% in November. Services inflation was 4.4% in the month of December. This is the lowest since March 2022. It was 5.0% a month earlier.
Looking Ahead and Factory Gate Prices
Sanjay Raja of Deutsche Bank provided a note of caution. He doesn’t foresee a straight line down for inflation. He cited minimum wage increases in April. Sanjay Raja also cited rising energy and food prices. He sees the price momentum spike as unsustainable. Price inflation is likely to return to more normal levels next year, he predicts. Factory gate prices increased 0.1% in December from a year earlier. They fell 0.5% in November.
