UK inflation dips to 2.5% in December in boost for Rachel Reeves

UK inflation unexpectedly dipped in December for the first time in three months, as hotel prices fell and tobacco costs eased.

Prices rose 2.5% in the year to December, down from 2.6% the month before, the Office for National Statistics (ONS) said.

Despite the drop, the rate of price rises remains above the target of the Bank of England, which will make its next interest rates decision next month.

The latest figures come as Chancellor Rachel Reeves faces pressure due to the pound slumping and government borrowing costs hitting their highest level for several years.

Grant Fitzner, chief economist of the ONS, said while hotel prices had fallen last month, the price decreases were offset by the cost of fuel and second-hand cars rising.

Tobacco prices also increased by less than in December 2023, he added, which was a factor in the overall rate of inflation coming down.

Falling inflation does not mean prices are decreasing, but are now rising at a slower pace.

But economists had expected inflation to remain unchanged last month, so the falling rate will be welcome news for Reeves, who hit back at critics and pledged to go “further and faster” to improve economic growth – the government’s main priority.

She said following the inflation figure announcement there was “still work to be done to help families across the country with the cost of living”, but said the government had “taken action to protect working people’s payslips from higher taxes” and increased the minimum wage.

“We were clear that growth is our number one priority to put more money in the pockets of working people,” she said.

Michael Saunders, a former member of the Bank of England’s monetary policy committee which sets interest rates, said the latest inflation figure would be “some help” in trying to ease some of the worries over UK interest rates.

“If it stays like this, we will be on route to slightly more interest rate cuts than the market is expecting,” he told BBC’s Today programme.

The Bank of England decided to hold interest rates at 4.75% last month, after policymakers said the UK economy had performed worse than expected, with no growth at all between October and December.

It will next set rates in February, but inflation remains over the Bank’s 2% target.

There are also concerns inflation could rise further, with firms warning they will raise prices to cover tax rises coming into force in April and the threat of potential trade taxes imposed by the US, with president-elect Donald Trump pledging a 20% tariff on all imports.

High inflation pushes up the cost of living for households, and can lead to interest rates remaining at a higher level, making the cost of loans, credit cards and mortgages, more expensive.