Surprise UK Inflation Dip as Core Prices Fall Sharply

Image Credit: Reuters

UK inflation unexpectedly slowed in December, with core price measures tracked by the Bank of England (BoE) falling more significantly, providing relief to Finance Minister Rachel Reeves following a recent market selloff.

The annual inflation rate dropped to 2.5% in December, down from 2.6% in November, according to the Office for National Statistics. Economists had expected inflation to remain at 2.6%. The BoE had predicted a 2.5% inflation rate for December in its November forecast.

The pound weakened after the release of the data.

"Policymakers and Treasury officials will breathe a small sigh of relief," said Scott Gardner, an investment strategist at J.P. Morgan-owned Nutmeg.

Recent heavy sell-offs in British government bonds have been driven by concerns that inflation may remain high, limiting the BoE’s ability to cut rates this year, potentially hindering economic growth and putting pressure on the government’s finances.

Core inflation, excluding energy, food, alcohol, and tobacco, dropped to 3.2% from 3.5% in November, a larger decline than the 3.4% expected. Services inflation stood at 4.4% in December, down from 5.0% the previous month, surpassing the expected dip to 4.9%.

The BoE looks closely at services and core inflation as key indicators of underlying price pressures, particularly driven by ongoing wage growth. 

"This softer report should reassure investors that the BoE can continue its gradual easing cycle, with the next rate cut expected in February," said Luke Bartholomew, deputy chief economist at abrdn.

Paraphrasing text from "Investing.com" all rights reserved by the original author.