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, with economists polled by Reuters expecting December’s reading to remain unchanged.
Core inflation, which excludes more volatile food and energy prices, fell to 3.2% in the twelve months to December, from 3.5% in November.
The UK inflation rate hit a more than three-year low of 1.7% in September, with monthly prices rising on the back of higher fuel costs and utility bills rising more faster than the price of goods. In December, the annual rate of inflation of services resulted in 4.4%, from 5% in November.
of British pound was down 0.3% against the dollar at 07:15 a.m. London time shortly after the release.
Commuters cross a junction near the Bank of England (BOE), left, in the City of London, UK, Wednesday, May 8, 2024. Bank of England policymakers appear more divided since they closed their walking cycle last year. illustrating the challenge Governor Andrew Bailey faces in steering his colleagues toward possible interest rate cuts in the coming weeks. Photo: Hollie Adams/Bloomberg via Getty Images
Bloomberg | Bloomberg | Getty Images
The data will be food for thought for the Bank of England ahead of 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 tight spot recently, with economists expressing concerns about the country’s sluggish growth prospects and worries about headwinds caused by both external factors such as tariffs possible trade after President-elect Donald Trump takes office, and domestic fiscal. and the 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 be done to help families across the country with the cost of living” and that economic growth was the UK’s priority.
The data will be “welcome news” to Rachel Reeves, commented Capital Economics UK deputy chief economist Ruth Gregory, with underlying price pressures looking “a bit more favorable than we thought.”
The reading strengthened the case for a 25 basis point interest rate cut by the BOE in February, she said in emailed comments, “and lends some support to our view that rates will fall further and faster than markets expect. “
“Our forecast is that CPI inflation will rebound in January, probably to almost 3.0% and that inflation will be slightly higher than most expect in the first half of this year. But we expect it to decline below the 2% target next year as inflation persistence fades further,” she said.
Fiscal challenges
The tax hikes announced by the government last autumn, which will take effect in April, have caused concern among British businesses who warn that investment, jobs and growth will be hampered.
The UK also saw its borrowing costs and currency weaken amid concerns over the country’s economic outlook and fiscal plans, posing a dilemma for Finance Minister Rachel Reeves’ ambitions to balance the budget.
Reeves has vowed to maintain self-imposed fiscal rules to ensure that all day-to-day spending is met by revenue and that government debt is on a downward trend. She may now be forced to decide whether to adjust or break these restrictions.
The choice she faces is to do nothing and hope that adverse borrowing conditions ease, raise taxes further – a move likely to draw more criticism from businesses and the public – or cut public spending , a step that is already under consideration. by the government, but goes against Labour’s anti-austerity stance. Last weekend, Reeves said the fiscal rules set out in the budget were “non-negotiable”, adding that “economic stability is the basis for economic growth and prosperity”.
Ben Zaranko, associate director at the Institute for Fiscal Studies, said Reeves faces “a pretty unenviable set of options.”
“This unfortunate state of affairs is largely the result of a difficult fiscal legacy and global economic factors,” he said in the commentary.
“But it also reflects a series of government choices and mutually incompatible promises: to stick to a hard, numerical fiscal rule, leaving only the best margins against it; to prioritize public services and avoid imposing another round of austerity; no bigger tax hikes, and no tax hikes again after the autumn budget and only one fiscal event a year called ‘space’, something will have to give,” Zaranko added.
