UK Inflation Falls to 2.5%, Surprising Economists and Boosting Rate Cut Prospects

By Evans Momodu
2 minute digest

Inflation unexpectedly dipped to 2.5% in December, following two consecutive months of increases, according to the Office for National Statistics (ONS). While prices continue to rise, they are doing so at a slower pace than before.

Economists had anticipated inflation to hold steady at 2.6%, the same rate recorded in November. Despite this decline, inflation remains above the Bank of England’s 2% target, though it aligns with the Bank’s forecasts made in November.

The surprising drop has increased the likelihood of an interest rate cut when the Bank of England’s Monetary Policy Committee (MPC) meets in three weeks.

Before the announcement, markets placed the probability of a rate cut at 62%. Following the inflation data release, this probability surged to 83%.

Two critical measures closely monitored by the Bank of England showed larger-than-expected declines. Services inflation, which is particularly influenced by wage growth, fell from 5% in November to 4.4%, significantly below the 4.9% forecast by economists.

Core inflation, which excludes volatile items like energy and food, dropped from 3.5% in November to 3.2%, providing a clearer picture of underlying price trends.

The data brings relief to Chancellor Rachel Reeves, who has been under pressure over her economic policies. The easing inflation figures may strengthen her position as she faces scrutiny over cost-of-living challenges.

The unexpected decline offers hope for consumers and businesses grappling with high borrowing costs, potentially signaling a turning point in the Bank’s monetary policy strategy.
Source: Sky news 
Image:  NIESR