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LONDON – UK inflation fell to a lower-than-expected 2.5% in December, with core price growth slowing further, according to data released by the Office for Statistics National on Wednesday.
The consumer price index (CPI) rose 2.6% in November, with economists polled by Reuters expecting December’s reading to be unchanged.
Core inflation, which excludes the more volatile prices of food and energy, rose to 3.2% in the twelve months to December, from 3.5% in November.
The UK inflation rate hit a more than three-year low of 1.7% in September, with monthly prices rising on the back of higher fuel costs and services charges. which increase faster than the price of goods. In December, annual services inflation was 4.4%, up from 5% in November.
U British pound was down 0.3% against the dollar at 07:15 am London time, shortly after the release.
Commuters cross a junction near the Bank of England (BOE), left, in the city of London, United Kingdom, Wednesday, May 8, 2024. The Bank of England’s decision makers appear to be the most divided since they closed its walking cycle last year. , illustrating the challenge Governor Andrew Bailey faces in leading his colleagues toward possible interest rate cuts in the coming weeks. Photographer: Hollie Adams/Bloomberg via Getty Images
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The data will be food for thought for the Bank of England ahead of its next meeting on February 6, in which The central bank is expected to cut the key interest rate from 4.75% to 4.5%, despite inflationary pressures, such as resistant wage growth and uncertainty about Britain’s economic outlook. . The central bank’s inflation target is 2%.
The UK economy has been in a tight spot of late, with economists expressing concerns the country’s slow growth prospects and concerns about headwinds caused by both external factors, such as potential trade tariffs once President-elect Donald Trump takes office, and domestic fiscal and economic challenges that have dogged the Labor government and the Treasury since the October budget.
Responding to the latest data, British Chancellor Rachel Reeves said on Wednesday that “there is still work to be done to help families across the country with the cost of living”, and that economic growth was the priority of the United Kingdom.
The data will be “welcome news” for Rachel Reeves, UK Economist at Capital Economics, Ruth Gregory commented, with underlying price pressures looking “a bit more favorable than we thought”.
The reading strengthened the case for a 25 basis point interest rate cut by the BOE in February, he said in emailed comments, “and lends some support to our view that rates will fall further and faster than what the markets expect.”
“Our forecast is that CPI inflation will rebound in January, perhaps to almost 3.0% and that inflation will be a little higher than most expect in the first half of this year. But we expect it to come down below to the 2% target next year as the persistence of inflation fades further,” he said.
Fiscal challenges
The tax increases announced by the government last autumn, which are due to come into effect in April, have caused consternation among British businesses who warn that investment, hiring and growth will be dampened.
The UK has also seen its borrowing costs and currency weaken amid jitters about the country’s economic outlook and fiscal plans, posing a dilemma for Finance Minister Rachel Reeves’ ambitions to balance the budget.
Reeves promised to stick to the self-imposed fiscal rules to ensure that all daily expenses are met from revenues and that the government’s debt is on a downward trend. You may now be forced to decide whether to adjust or break these restrictions.
The choice it faces is to do nothing and hope that adverse lending conditions clear, to raise rates further – a move likely to draw further criticism from businesses and the public – or to cut public spending, a step that has already been taken by the government but goes against the anti-“austerity” position of Labour. last weekend, Reeves said the tax rules set out in the budget were “non-negotiable”. adding that “economic stability is the basis of economic growth and prosperity.”
Ben Zaranko, associate director at the Institute for Fiscal Studies, said Reeves faces “a rather enviable set of options.”
“This unfortunate situation is largely the consequence of a difficult fiscal legacy and global economic factors,” he said in a comment.
“But it also reflects a series of government choices and mutually incompatible promises: to adhere to a hard and numerical fiscal rule, leaving only the best margins against it; to prioritize public services and avoid imposing a another round of austerity; not to raise more austerity, and not to raise rates again after the Autumn Budget and to hold only one fiscal event per year. “headroom,” something’s got to give,” Zaranko added.
