LONDON — Inflation in Britain fell to a lower-than-expected 2.5% in December, according to data released Wednesday by the Office for National Statistics, with growth in core prices slowing further.
The Consumer Price Index (CPI) rose to 2.6% in November, and economists polled by Reuters expected the December reading to remain unchanged.
Core inflation, which excludes more volatile food and energy prices, was 3.2% in the twelve months to December, down from 3.5% in November.
The UK's inflation rate hit a more than three-year low of 1.7% in September, with monthly prices rising since then as higher fuel costs and service charges rising faster than goods prices. In December, the annual inflation rate in the services sector was 4.4%, up from 5% in November.
The British pound fell 0.3% against the dollar at 7:15 a.m. London time, shortly after publication.
Commuters crossing a junction near the Bank of England (BOE) turn left in the City of London, Britain, on Wednesday, May 8, 2024. Bank of England policymakers appear most divided since the end of the walking cycle last year, as illustrated by the challenge Gov. Andrew Bailey faces as he steers his colleagues toward possible rate cuts in the coming weeks. Photographer: Hollie Adams/Bloomberg via Getty Images
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The data will provide food for thought for the Bank of England before its next meeting on February 6, at which The central bank is expected to cut its key interest rate from 4.75% to 4.5% despite inflationary pressures such as stable wage growth and uncertainty about the UK's economic prospects. The central bank's inflation target is 2%.
The British economy has recently found itself in a difficult situation, which has raised concerns among economists poor prospects for the country's economic growth and concerns about difficulties caused by both external factors, such as potential trade tariffs once President-elect Donald Trump takes office, and the domestic fiscal and economic challenges that have dogged the Labor government and the Treasury since the October budget.
Responding to the latest figures, British Chancellor Rachel Reeves said on Wednesday that “there is still much work to be done to help families across the country meet the cost of living” and that the UK's priority was economic growth.
Data will be 'good news' for Rachel Reeves Capital Economics UK deputy chief economist Ruth Gregory commented that the underlying price pressures appear to be “a bit more favorable than we thought”.
The reading strengthened the case for the BOE to cut rates by 25 basis points in February, she said in emailed comments, “and somewhat supports 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 slightly higher than most expect in the first half of this year. However, we expect it to fall below the 2% target next year as persistence of inflation weakens further,” she said.
Fiscal challenges
Tax rises announced by the government last autumn and due to come into force in April have caused consternation among British businesses, who warn that investment, employment and growth will be held back.
In the UK, borrowing costs and the currency weakened due to fluctuations related to the country's economic outlook and fiscal plans, which puts Finance Minister Rachel Reeves in a dilemma over her ambition to balance the budget.
Reeves promised to follow self-imposed fiscal rules to ensure that all daily expenses were met by revenues and that the national debt continued to decline. She may now be forced to decide whether to improve or break these restrictions.
The choice he faces is to do nothing and hope that unfavorable borrowing conditions subside, raise taxes further – which could draw more criticism from businesses and the public – or cut public spending – a step that is already being considered by the government, but is contrary to Labour's anti-austerity stance. Last weekend, Reeves said the budget's fiscal rules were “non-negotiable.” adding that “economic stability is the basis of economic growth and prosperity.”
Ben Zaranko, deputy director of the Institute for Fiscal Studies, said Reeves faces a “rather unenviable set of options.”
“This unfortunate situation is largely a consequence of a difficult fiscal legacy and global economic factors,” he said in a commentary.
“But it also reflects a series of government choices and contradictory promises: sticking to a hard, numerical fiscal rule, leaving only the slimmest of margins; prioritizing public services and avoiding imposing another round of austerity; not raising the biggest taxes and not raising them again after the autumn budget, and having only one fiscal event per year if higher interest rates eliminate the so-called “clearance”, something will have to give,” Zaranko added.