The unexpected easing of UK consumer price inflation at the close of 2024 has heightened the anticipation of further interest rate reductions by the Bank of England this year.
According to the Office for National Statistics, the consumer price index experienced an annual rise of 2.5 percent in December, a slight decline from the 2.6 percent recorded in November. This outcome defied expectations, which had forecast the rate to remain stable at 2.6 percent.
Month-on-month, the CPI increased by 0.3 percent, following a 0.1 percent increment in November, whereas analysts had anticipated a rise of 0.4 percent.
When energy, food, alcohol, and tobacco are excluded, core inflation diminished to 3.2 percent in December from 3.5 percent in the previous month, falling short of economists' prediction of 3.4 percent.
Goods inflation rose to 0.7 percent from 0.4 percent, whereas services inflation decreased to 4.4 percent from 5.0 percent, primarily owing to a sharp decline in airfare inflation.
Ruth Gregory, an economist at Capital Economics, noted that the reduction in inflation strengthens the argument for a 25-basis point rate cut in February and supports the view that rates could decrease more swiftly and significantly than the market anticipates. UK bond yields reached multiyear highs last week due to concerns about the British economy and the financial standing of the UK government. Although this unexpected dip in inflation offers a brief reprieve amidst the financial markets' upheaval, any relief could be ephemeral given that headline inflation remains markedly above the BoE's 2 percent target and both domestic and global inflationary pressures are on the rise.
ICAEW Economics Director Suren Thiru commented that while these figures make a February interest rate cut more plausible, current market volatility and heightened global inflation risks mean that any decision to loosen policy next month is not yet a certainty.
In separate data released by the ONS, input prices saw a decline for the fifth consecutive month in December, dropping by 1.5 percent annually after a 2.1 percent decrease.
Conversely, factory gate prices increased by 0.1 percent after declining for three months straight. November had seen a reduction of 0.5 percent.
On a monthly scale, input prices inched up by 0.1 percent, compared to a stagnant performance in November. Likewise, output prices rose by 0.1 percent, following a 0.4 percent rise in November. Additionally, the ONS reported that average house prices climbed by 3.3 percent, reaching GBP 290,000, compared to a 3.0 percent increase in October.
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