UK inflation witnessed a surprising decline in December, easing to 2.5% from a previous 2.6% reading in November. This unexpected drop, reported by the Office for National Statistics, offered some respite to Chancellor Rachel Reeves following a turbulent week in financial markets. Despite this relief, inflation remains above the Bank of England's 2% target, with concerns it could rise above 3% before year-end. This development comes as the UK grapples with economic pressures and potential fiscal policy adjustments.
Interest rates in the UK currently stand at 4.75%, following cuts made in August and November of last year. The Bank of England has indicated a gradual approach to further reducing borrowing costs, especially after inflation had previously peaked at over 11% in late 2022. The latest data also revealed a slowdown in core inflation, which excludes volatile items like energy, food, alcohol, and tobacco, dropping from 3.5% in November to 3.2% in December.
Services inflation, a key focus for the Bank of England, decreased from 5% to 4.4%. Meanwhile, the cost of tobacco contributed to the downward trend as prices increased less than during the same period last year. City economists had anticipated inflation would remain unchanged from the previous month, making the actual figures a welcome surprise for policymakers.
Chancellor Rachel Reeves expressed readiness to implement emergency spending cuts if necessary to maintain fiscal balance. She emphasized her commitment to economic growth and improving living standards across the UK.
“There is still work to be done to help families across the country with the cost of living. That’s why the government has taken action to protect working people’s payslips from higher taxes, frozen fuel duty and boosted the national minimum wage.” – Rachel Reeves
Despite these positive indicators, investors warn that sustained higher borrowing costs may compel Reeves to reconsider her pledge against tax increases if fiscal rules face potential breaches.
The pound experienced a slight decline, falling by approximately 0.3% against the dollar to below $1.22 shortly after the release of these inflation figures. This reflects ongoing market sensitivities as investors assess the broader economic outlook.
Rachel Reeves underscored her dedication to fostering growth through government policies designed to uplift economic conditions for all citizens.
“In our ‘Plan for Change’, we were clear that growth is our number one priority to put more money in the pockets of working people. I will fight every day to deliver that growth and improve living standards in every part of the UK.” – Rachel Reeves