Home news Surprise fall in UK inflation to 2.5% eases pressure on Rachel Reeves...

Surprise fall in UK inflation to 2.5% eases pressure on Rachel Reeves | Inflation

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UK inflation unexpectedly fell in December, handing some breathing space to the chancellor, Rachel Reeves, after a week of turbulence in financial markets.

With the government under pressure on the economy, figures from the Office for National Statistics showed the consumer prices index eased to 2.5%, below a reading of 2.6% in November, meaning prices rose at a slower rate.

City economists had forecast inflation would remain unchanged on the previous month.

In a crunch economic update just as the government battles to reassure jittery bond market investors, the latest snapshot could open the door for the Bank of England to cut interest rates from as early as next month.

Threadneedle Street had signalled it would take a gradual approach to cutting borrowing costs after a fall in inflation from a peak of more than 11% in late 2022 when soaring energy prices fuelled a surge in the cost of living. UK interest rates stand at 4.75%, after cuts in August and November last year.

However, analysts have warned that sticky inflation could derail cuts from the central bank despite stalling economic growth. Investors also warn Reeves could be forced to U-turn on a pledge not to increase taxes should sustained higher borrowing costs threaten to break her fiscal rules.

Inflation remains above the Bank’s 2% target, while economists warn it could rise above 3% before the end of this year.

The chancellor on Tuesday signalled she was prepared to make emergency spending cuts to balance the books if required, while arguing her priority was to go “further and faster” to boost economic growth in an effort to placate financial markets.

More details to follow …

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