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LONDON — UK inflation eased to a lower-than-expected 2.5% in December, with core price growth slowing further, data from the Office for National Statistics showed on Wednesday.
The consumer price index (CPI) rose to 2.6% in November, and economists polled by Reuters expect December’s figures to remain unchanged.
Core inflation, which excludes more volatile food and energy prices, was 3.2% in the twelve months to December, compared with 3.5% in November.
Britain’s inflation rate hit a more than three-year low of 1.7% in September, with monthly prices rising due to higher fuel prices and rising service charges rising faster than goods prices. The annual rate of inflation in the services sector was 4.4% in December against 5% in November.
The British pound rose 0.1% against the dollar at 08:15 a.m. London time, reversing an initial drop earlier in the session, after data release.
Commuters cross a junction near the Bank of England (BOE), left, in the City of London, Britain, Wednesday, May 8, 2024. Bank of England policymakers look the most divided since they ended their walking tour last year, illustrating the challenge Governor Andrew Bailey faces in steering his peers toward possible interest rate cuts in the coming weeks. Photographer: Hollie Adams/Bloomberg via Getty Images
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The data will provide food for thought for the Bank of England ahead of its next meeting on February 6, at which The central bank is expected to cut its key interest rate from 4.75% to 4.5% despite inflationary pressures such as persistent wage growth and uncertainty about Britain’s economic outlook. The central bank’s inflation target is 2%.
The UK economy has been in dire straits recently, and economists are expressing concern sluggish growth prospects of the country and concerns about headwinds from both external factors, such as potential trade tariffs after President-elect Donald Trump takes office, and the domestic fiscal and economic problems that have dogged the Labor government and the Treasury since the October Budget.
Responding to the latest data, UK Chancellor Rachel Reeves said on Wednesday that “more work needs to be done to help families across the country with the cost of living” and that economic growth is the UK’s priority.
The data will be “welcome news” to Rachel Reeves, Capital Economics UK deputy chief economist Ruth Gregory commented, with underlying price pressures looking “a bit more supportive than we thought”.
The reading strengthened the case for the Bank of England to cut interest rates by 25 basis points in February, she said in emailed comments, “and provides some support for our view that rates will fall further and faster than markets expect.”
“Our forecast is that CPI inflation will pick up in January, perhaps closer to 3.0%, and inflation will be slightly higher than most expect in the first half of this year. But we expect it to come back lower next year for the target 2% sustainability of inflation further fades away,” she said.
Fiscal problems
The tax hike announced by the government last autumn, which is due to take effect in April, has sparked consternation among British companies, who warn that investment, hiring and growth will be held back.
Borrowing prices and the UK currency also fell amid worries about the country’s economic outlook and fiscal plans, poses a dilemma for Finance Minister Rachel Reeves’ ambitions to balance the budget.
Reeves has pledged to stick to self-imposed fiscal rules to make sure all day-to-day spending is covered by revenue and that the national debt tends to decline. Now she may be forced to decide whether to adjust or break those restrictions.
It faces a choice between doing nothing and hoping bad borrowing conditions subside, raising taxes further – a move that could draw more criticism from business and the public – or cutting public spending – a move already under discussion by the government but at odds with Labour’s position against “austerity”. last weekend Reeves said the fiscal rules laid out in the budget are “non-negotiable.” adding that “economic stability is the foundation of economic growth and prosperity.”
Ben Zaranko, deputy director of the Institute for Fiscal Studies, said Reeves faces “a pretty unenviable set of options.”
“This unfortunate situation is largely the result of a complex fiscal legacy and global economic factors,” he said in a comment.
“But it also reflects a series of government choices and mutually incompatible promises: to stick to a strong digital fiscal rule, leaving only the best reserves against it; prioritize public services and avoid imposing another round of austerity; not to raise the highest taxes, and not to raise taxes again after the autumn budget; and conducts only one fiscal event per year, when higher interest rates destroy the so-called “reserve”, something will have to give,” Zaranko added.
