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LONDON – UK inflation fell to a lower-than-expected 2.5% in December, with core price growth slowing further, according to data released by the Office for National Statistics on Wednesday.
The consumer price index (CPI) rose to 2.6% in November, and economists polled by Reuters expected December’s reading to remain unchanged.
Core inflation, which excludes the most volatile food and energy prices, reached 3.2% in the twelve months to December, up from 3.5% in November.
The UK inflation rate had hit a more than three-year low of 1.7% in September, with monthly prices rebounding since then due to higher fuel costs as utility rates rose faster than the price of goods. In December, the annual inflation rate for services stood at 4.4%, compared to 5% in November.
He british pound rose 0.1% against the dollar at 08:15 am London time, reversing an initial decline earlier in the session, after data publication.
Commuters crossing an intersection near the Bank of England (BOE), left, in the City of London, United Kingdom, on Wednesday, May 8, 2024. Bank of England policymakers appear to be the most divided since they closed their walking cycle last year. , illustrating the challenge Gov. Andrew Bailey faces in guiding his colleagues toward potential interest rate cuts in the coming weeks. Photographer: Hollie Adams/Bloomberg via Getty Images
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The data will be food for thought for the Bank of England before its next meeting on February 6, in which The central bank is expected to cut the key interest rate from 4.75% to 4.5%, despite inflationary pressures such as resilient wage growth and uncertainty over Britain’s economic outlook. The central bank’s inflation target is 2%.
The UK economy has found itself in a difficult situation lately, and economists have expressed concern about the country’s weak growth prospects and concerns about headwinds caused by external factors, such as potential trade tariffs once President-elect Donald Trump takes office, and Domestic fiscal and economic challenges that have dogged the Labor government and the Treasury since the October budget..
Responding to the latest data, British Chancellor Rachel Reeves said on Wednesday that “there is still work to do to help families across the country with the cost of living” and that economic growth was the UK’s priority.
The data will be “good news” for Rachel Reeves, said Capital Economics UK deputy chief economist Ruth Gregory, as underlying price pressures look “a little more favorable than we had thought”.
The reading strengthened the case for a 25 basis point interest rate cut by the BOE in February, he said in emailed comments, “and provides some support for our view that rates will fall further and further.” faster than the markets expect.
“Our forecast is that CPI inflation will recover in January, perhaps to almost 3.0% and that inflation will be a little higher than most expect in the first half of this year. But we expect it to fall by below the 2% target next year as we move forward, the persistence of inflation fades further,” he said.
Tax challenges
Tax increases announced by the government last autumn, due to come into force in April, have caused consternation among British businesses who warn that investment, hiring and growth will be curbed.
The United Kingdom also saw its borrowing costs and currency weaken amid concerns about the country’s economic outlook and fiscal plans. posing a dilemma for Finance Minister Rachel Reeves’ ambitions to balance the budget.
Reeves has promised to maintain self-imposed fiscal rules to ensure that all daily spending is covered by revenue and that public debt is on a downward trend. Now it could be forced to decide whether to modify or break these restrictions.
The choice it faces is to do nothing and wait for unfavorable borrowing conditions to ease, raise taxes further (a move that is likely to draw further criticism from businesses and the public) or cut public spending, a move that has already been discussed by the government, but goes against Labour’s anti-“austerity” position. Last weekend, Reeves said the fiscal rules laid out in the budget were “non-negotiable.” adding that “economic stability is the basis of economic growth and prosperity.”
Ben Zaranko, associate director of the Institute for Fiscal Studies, said Reeves faces “an unenviable set of options.”
“This unfortunate situation is largely a consequence of a difficult fiscal legacy and global economic factors,” he said in a comment.
“But it also reflects a series of mutually incompatible government choices and promises: stick to a strict numerical fiscal rule leaving only the slightest margin against it; prioritize public services and avoid imposing another round of austerity; do not raise the highest taxes and not to raise taxes again after the autumn budget; and to hold only one fiscal event a year, if higher interest rates eliminate the so-called “margin margin”, something will have to give,” Zaranko added.
