UK inflation unexpectedly fell last month, official figures show, providing “timely respite” for Chancellor Rachel Reeves amid concerns over turmoil in the financial markets.
The cost of Government borrowing eased on Wednesday morning as traders reacted to the latest economic data.
The rate of Consumer Prices Index inflation fell to 2.5% in December from 2.6% in November, the Office for National Statistics said.
Most analysts had been expecting the inflation rate to remain unchanged at 2.6% last month.
December’s headline figure nevertheless remains above the Bank of England’s 2% target level, which has raised concern for economists and policymakers amid stagnant economic growth.
Fears over so-called stagflation – where inflation is high but economic growth is low – have helped fuel a period of volatility in the financial markets over the past week.
This has seen the value of the pound drop sharply and the cost of borrowing rise to decades-high levels, indicating weaker confidence in the economy.
But yields on government bonds, also known as gilts, eased shortly after markets opened on Wednesday morning.
The 30-year gilt yield dropped about five basis points to 5.4%, and the 10-year gilt yield was also down about five basis points to 4.84%.
Chancellor Ms Reeves responded to the latest inflation figures by saying she will “fight every day” to improve people’s living standards.
“There is still work to be done to help families across the country with the cost of living,” she said.
“I will fight every day to deliver that growth and improve living standards in every part of the UK.”
Former Bank of England policymaker Michael Saunders said Downing Street will be breathing a “sigh of relief” after the surprise dip in December inflation.
He added that it will be “some help” in easing some of the “worries about the outlook for the UK”.
Suren Thiru, economics director for the Institute of Chartered Accountants in England and Wales (ICAEW), said the surprise decline “provides some timely respite amid the financial markets turmoil”.
But he added that “any relief could be short-lived” due to inflation pressure growing this year.
“Despite December’s unexpected decline, the near-term outlook for UK inflation remains ominous with higher energy bills likely to push the headline rate above 3% over the coming months, aided by April’s expected rise on Ofgem’s energy price cap,” he said.
Sanjay Raja, chief UK economist for Deutsche Bank, said Wednesday’s inflation report will be a “welcome relief for the Treasury and the Bank of England”.
“Bottom line, the Bank of England will likely feel emboldened to continue its easing cycle in February,” he said, meaning interest rates could be cut again next month.
The ONS said a 1.9% decrease in the price of hotels, and a slower increase in prices across restaurants and cafes put the most downward pressure on overall inflation, while the cost of air fares also rose at a much slower rate in December.
This helped services inflation – a metric closely watched by the Bank of England – fall to 4.4% in December, from 5% in November.
Clothing and footwear, alcohol and tobacco prices also decreased in December compared with the previous month.
On the other hand, petrol and diesel prices increased in December, compared with November, with the transport sector putting the biggest upward pressure on inflation.
Grant Fitzner, the ONS’s chief economist, said: “Inflation eased very slightly as hotel prices dipped this month, but rose a year ago.
“The cost of tobacco was another downward driver, as prices increased by less than this time last year.
“This was partly offset by the cost of fuel and also second-hand cars, which saw their first annual growth since July 2023.”
The latest figures also showed that CPIH, a measure of inflation which includes owner-occupiers’ housing costs, remained unchanged at 3.5% in December.
Meanwhile, the Retail Prices Index (RPI) rate of inflation fell to 3.4% in December from 3.6% in November.
