UK Inflation Rate Sees Unexpected Decline to 2.5% in December Figures

UK Inflation Unexpectedly Dips to 2.5% in December

The UK’s inflation rate unexpectedly slowed down in December, coming in at 2.5%. This is a decrease from the 2.6% recorded in November and marks the first time in two months that prices have risen at a slower pace.

Key Drivers of the Decrease in Inflation

The easing price rises in restaurants and falling hotel prices were significant contributors to the overall decline in inflation. Additionally, the cost of tobacco decreased as prices increased by less than they did in December last year. The ONS chief economist, Grant Fitzner, attributed this decrease to the dip in hotel prices and the slowing down of tobacco costs.

Impact on Financial Markets

The latest inflation figures have had a significant impact on financial markets. Economists had anticipated that inflation would remain at 2.6% for December, but the actual figure came as a surprise. This has led to an increase in the probability of interest rate cuts by the Bank of England next month, with financial markets now assigning a 74% probability.

Breakdown of the Inflation Figures

The cost of hotels fell by 1.9% between November and December, contributing to the overall decline. Meanwhile, the cost of dining out at restaurants and cafes rose at a slower pace than in the same period a year ago, further helping to ease inflationary pressure. The cost of alcohol and tobacco rose at an annual rate of 5.3%, down from 6.8% in November.

Government Response

Chancellor Rachel Reeves stated that there is still work to be done to help families across the country with the cost of living. She pointed out that the government has taken action to protect working people’s payslips from higher taxes, frozen fuel duty, and boosted the national minimum wage.

Impact on Public Finances

The latest inflation figures come amid mounting pressure on the UK’s public finances. Government borrowing costs have reached their highest levels in years, while the pound has also slumped against the dollar, sparking criticism of Reeves’ handling of the economy and her recent tax increases outlined in the budget.