Just as Chancellor Rachel Reeves was firefighting market jitters and defending her economic policies, a welcome reprieve arrived in the form of an unexpected dip in UK inflation. New data from the Office for National Statistics (ONS) showed consumer prices rose by 2.5% in December, slowing from November’s 2.6% pace and defying economist forecasts of no change.
While inflation remains above the Bank of England’s 2% target, the surprise deceleration offers Reeves a bit of breathing room amid intensifying pressures. Markets have been rattled in recent days, with the pound tumbling and government borrowing costs spiking, as investors fret over the UK’s fiscal position and lackluster growth prospects.
Inflation Drivers and Core Measures
According to the ONS, December’s inflation cooldown was driven by lower hotel prices and a smaller rise in tobacco costs compared to a year earlier. However, these downward forces were partially offset by rising fuel prices and the first annual increase in secondhand car prices since July 2023.
Notably, core inflation, which strips out volatile energy, food, alcohol and tobacco prices, also undershot expectations, easing from 3.5% to 3.2%. This suggests underlying price pressures may be starting to moderate. Services inflation, a key focus for the Bank of England, decelerated as well from 5% to 4.4%.
Potential Interest Rate Implications
The inflation downside surprise has fueled speculation that the Bank of England could cut interest rates as soon as next month. Rates currently stand at 4.75% following modest cuts in August and November, as policymakers try to balance taming inflation with supporting a fragile economy. However, some analysts caution that stubborn price pressures could still derail the central bank’s gradual easing plans.
There is still work to be done to help families across the country with the cost of living. That’s why the government has taken action to protect working people’s payslips from higher taxes, frozen fuel duty and boosted the national minimum wage.
– Chancellor Rachel Reeves
Reeves Under Pressure
For Reeves, who has pledged to go “further and faster” on growth while not raising taxes, the inflation news offers a momentary bright spot. But serious challenges remain. With markets on edge, the Chancellor this week signaled openness to emergency spending cuts if needed to meet her fiscal rules and calm investors. Analysts warn sustained high borrowing costs could still force a U-turn on her tax pledges.
As the UK economy teeters on the brink of recession, the inflation trajectory will be critical in shaping both monetary and fiscal policy in the coming months. While December’s figures provide a welcome breather, Reeves likely faces more tough decisions ahead in her battle to revive growth, repair public finances, and keep restless markets at bay. The inflation fight is far from over.
