LONDON — U.K. 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 the December reading to stay unchanged.
Core inflation, which excludes more volatile food and energy prices, came in at 3.2% in the twelve months to December, down from 3.5% in November.
The U.K.’s inflation rate had hit a more than three-year low of 1.7% in September, with monthly prices picking up since on the back of higher fuel costs and of services fees rising rising faster than the price of goods. In December, the annual services inflation rate stood at 4.4%, down from 5% in November.
The British pound was down 0.3% against the dollar at 07:15 a.m. London time, shortly after the release.
Commuters crossing a junction near the Bank of England (BOE), left, in the City of London, UK, on Wednesday, May 8, 2024. Bank of England policymakers appear the most divided since they brought their hiking cycle to a close last year, illustrating the challenge that Governor Andrew Bailey faces in steering his colleagues toward possible interest-rate cuts in the coming weeks. Photographer: Hollie Adams/Bloomberg via Getty Images
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The data will be food for thought for the Bank of England ahead of its next meeting on Feb.6, at 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 U.K. economy has found itself in a tight spot of late, with economists voicing concerns over the country’s sluggish growth prospects and worries over headwinds caused by both external factors, such as potential trade tariffs once President-elect Donald Trump takes office, and internal fiscal and economic challenges that have dogged the Labour government and Treasury since the October budget.
Responding the latest data, British Chancellor Rachel Reeves said 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 U.K.’s priority.
The data will be “welcome news” for Rachel Reeves, Capital Economics’ Deputy Chief UK Economist Ruth Gregory commented, with underlying price pressures appearing “a bit more favourable than we had 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, perhaps to almost 3.0% and that inflation will be a bit higher than most expect in the first half of this year. But we expect it to drop below the 2% target next year as the persistence of inflation fades further,” she said.
Fiscal challenges
Tax rises announced by the government last fall, which are due to come into effect in April, have caused consternation among British businesses that warn that investment, hiring and growth will be stunted.
The U.K. also saw its borrowing costs and currency weaken amid jitters over the country’s economic outlook and fiscal plans, posing a dilemma for Finance Minister Rachel Reeves’s ambitions to balance the budget.
Reeves has vowed to keep to self-imposed fiscal rules to make sure all day-to-day spending is met from revenues and that government debt is on a downward trend. She could now be forced to decide whether to tweak or break these restrictions.
The choice she faces is to do nothing and hope that unfavorable borrowing conditions subside, to hike taxes further — a move likely to elicit more criticism from businesses and the public — or to cut public spending, a step that is already mooted by the government but goes against Labour’s anti-“austerity” position. Last weekend, Reeves said the fiscal rules laid out in the budget were “non-negotiable,” adding that “economic stability is the bedrock for economic growth and prosperity.”
Ben Zaranko, associate director at the Institute for Fiscal Studies, said Reeves faces “a rather unenviable set of options.”
“This unfortunate predicament is largely the consequence of a difficult fiscal inheritance and global economic factors,” he said in comment.
“But it also reflects a series of government choices and mutually incompatible promises: to stick to a hard, numerical fiscal rule while leaving only the finest of margins against it; to prioritise public services and avoid imposing another round of austerity; not to raise the biggest taxes, and not to raise taxes again after the Autumn Budget; and to hold only one fiscal event per year. If higher interest rates wipe out the so called ‘headroom’, something will have to give,” Zaranko added.