UK inflation unexpectedly slows to 2.5% in December

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UK inflation unexpectedly slowed to 2.5 per cent in December as the economy weakened, easing pressure on chancellor Rachel Reeves and clearing the path for the Bank of England to press ahead with cutting interest rates.

The consumer price index figure was below November’s 2.6 per cent reading. Analysts had expected inflation to hold steady last month.

The data will provide some relief for Reeves, who is contending with higher borrowing costs that have been fuelled by fears the UK economy could be 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 early next month. Investors are betting that the central bank will cut rates by a quarter-point to 4.5 per cent.

The BoE has estimated that the economy stagnated in the final quarter of 2024. Business surveys point to weaker confidence and hiring, which could curb inflationary pressures.

Wednesday’s data showed that services inflation, which is closely watched by the BoE as a gauge of underlying price pressures, slowed sharply to 4.4 per cent from 5 per cent previously.

Core inflation, which excludes food and energy, dropped to 3.2 per cent from 3.5 per cent.

The pound weakened slightly after the data release, down 0.3 per cent on the day at $1.218. Traders in swaps markets had attributed a 60 per cent chance to a quarter-point cut next month, according to levels before the data was released.

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

This is a developing story

Additional reporting by Ian Smith