UK inflation unexpectedly slows to 2.5% in December

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UK inflation unexpectedly slowed to 2.5 percent in December as the economy weakened, easing pressure on Chancellor Rachel Reeves and clearing the way for the Bank of England to cut interest rates.

The consumer price index figure was down from November’s 2.6 percent. Analysts had expected inflation to remain stable last month.

The data will provide some relief for Reeves, who is struggling with higher borrowing costs that have been fueled by fears that the UK economy could enter a period of stagnation.

On Tuesday, Reeves dropped calls for his resignation as his conservative opposite number Mel Stride accused him of overseeing a “Shakespearean tragedy” as borrowing costs hit a 16-year high.

The Office for National Statistics report comes as the BoE’s monetary policy committee prepares to hold its first meeting of 2025 early next month. Investors are betting that the central bank will cut by a quarter point to 4.5 percent.

Tomasz Wiladek, chief European economist at T Rowe Price, said the data was “a clear green light for another series cut”.

The BoE estimates that the economy stagnates in the last quarter of 2024. Business surveys point to weak confidence and hiring, which could moderate inflationary pressures.

Wednesday’s data showed that services inflation, which is closely watched by the BoE as a gauge of price pressures, fell sharply to 4.4 percent from 5 percent earlier.

Core inflation, which excludes food and energy, fell to 3.2 percent from 3.5 percent.

The pound weakened slightly after the data, falling 0.3 percent on the day to $1.218. Swap market traders attributed a 60 percent chance of a quarter-point cut next month, according to levels before the data release.

The central bank cut its key rate to 4.75 percent in two quarter-point moves last year.

Additional reporting by Ian Smith