In December, the UK's Consumer Prices Index (CPI) inflation rate unexpectedly declined to 2.5% from November's 2.6%, defying economists' forecasts of a steady rate. This downturn is largely attributed to reduced costs in the hospitality sector, particularly within restaurants and hotels.
The easing inflation offers a reprieve for Chancellor Rachel Reeves, who has been contending with escalating borrowing expenses and concerns over potential stagflation. The deceleration in price growth may influence the Bank of England's monetary policy, with markets now anticipating a 75% likelihood of a 0.25% interest rate reduction in February.
Core inflation, which excludes volatile items such as food and energy, also saw a decline, dropping to 3.2% from 3.5%. This suggests a broad-based reduction in price pressures across the economy. However, the inflation rate remains above the Bank of England's 2% target, indicating that while progress has been made, further efforts are necessary to achieve price stability.
Despite the positive inflation data, the UK economy faces challenges, including diminished business confidence and a slowdown in hiring, which could further alleviate inflationary pressures but also signal potential economic stagnation. The unexpected inflation drop led to a 0.2% depreciation of the pound against the dollar, reflecting market adjustments to the new economic indicators.
Looking ahead, the Bank of England's Monetary Policy Committee is scheduled to convene on February 6 to deliberate on interest rate decisions. The recent inflation figures are likely to play a pivotal role in their considerations, as they balance the objectives of controlling inflation and supporting economic growth.
