UK inflation suddenly drops to 2.5% in December

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UK inflation unexpectedly fell to 2.5 percent in December as the economy weakened, easing pressure on chancellor Rachel Reeves and clearing the way for the Bank of England to push ahead with interest rate cuts.

The consumer price index was below November’s 2.6 percent reading. Analysts expected inflation to remain stable last month.

It will provide relief to Reeves, who is struggling with high borrowing costs fueled by fears that the UK economy could be heading into recession.

The Office for National Statistics report comes as the BoE’s Monetary Policy Committee prepares to hold its first meeting for 2025 early next month. Investors are betting that the central bank will cut rates by a quarter point to 4.5 percent.

The BoE estimated that the economy weakened in the last quarter of 2024. Business surveys point to weak confidence and hiring, which could curb price pressure.

Wednesday’s data showed that the price of services, closely watched by the BoE as a measure of inflationary pressures, decreased sharply to 4.4 percent from 5 percent earlier.

Core inflation, which excludes food and energy, fell to 3.2 percent from 3.5 percent.

The pound weakened slightly after the data release, falling 0.3 percent on the day to $1.218. Traders in the swaps market said there was a 60 percent chance of a decline next month, based on conditions before the data was released.

The central bank lowered its key rate to 4.75 percent in two quarterly steps last year.

This is an ongoing story