LONDON — Inflation in the United Kingdom fell to a lower-than-expected 2.5% in December, with core price growth slowing further, according to data released Wednesday by the Office for National Statistics.
The consumer price index (CPI) rose to 2.6% in November, with economists polled by Reuters expecting the December figure to remain unchanged.
Core inflation, which excludes more volatile food and energy prices, stood at 3.2% in the twelve months ended December, up from 3.5% in November.
The UK’s inflation rate hit its lowest level in more than three years at 1.7% in September, with prices rising monthly since due to rising fuel costs and rising prices. service costs faster than the price of goods. In December, the annual inflation rate for services stood at 4.4%, compared to 5% in November.
THE Pound sterling was down 0.3% against the dollar as of 7:15 a.m. London time, shortly after publication.
Commuters crossing a junction near the Bank of England (BOE), left, in the City of London, UK, Wednesday May 8, 2024. Bank of England policymakers appear the most divided since that they ended their hiking cycle last year. , illustrating the challenge Gov. 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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This data will give the Bank of England food for thought ahead of 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 resilient wage growth and uncertainty over the UK economic outlook. The central bank’s inflation target is 2%.
The UK economy has found itself in a difficult situation of late, with economists expressing concerns over the country’s sluggish growth prospects and headwinds caused by both external factors, such as potential tariffs and once President-elect Donald Trump is in power, and internal public finances. and the economic challenges that have dogged the Labor government and the Treasury since the October budget.
Responding to the latest data, British Chancellor Rachel Reeves said on Wednesday that “there was still work to be done to help families across the country cope with the cost of living” and that economic growth was the government’s priority. United Kingdom.
The data will be “good news” for Rachel Reeves, commented Ruth Gregory, deputy chief economist at Capital Economics in the UK, with underlying price pressures appearing “a little more favorable than we thought”.
The figures strengthen the case for a 25 basis point interest rate cut by the BoE in February, she said in emailed comments, “and support to some extent our view that rates will fall further and faster than markets expect.
“Our forecast is that CPI inflation will rebound in January, perhaps to near 3.0% and that inflation will be a little higher than most expect in the first half of this year. But we expect it to fall below the 2% target next year as persistent inflation fades further,” she said.
Tax Challenges
Tax rises announced by the government last fall, due to come into force in April, have caused consternation among British businesses who warn that investment, hiring and growth would be hampered.
The UK has also seen its borrowing costs and currency weaken due to concern over the country’s economic outlook and fiscal plans, posing a dilemma for Finance Minister Rachel Reeves’ ambitions to balance the budget.
Reeves pledged to follow his self-imposed budget rules to ensure that all day-to-day expenses are covered by revenues and that the public debt is on a downward trend. It may now be forced to decide whether to modify or break these restrictions.
The choice it faces is to do nothing and hope unfavorable borrowing conditions ease, to raise taxes further – a move likely to draw more criticism from businesses and the public – or to reduce public spending, a measure already mentioned 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 foundation of economic growth and prosperity.”
Ben Zaranko, associate director of the Institute for Fiscal Studies, said Reeves faced “a rather unenviable set of options.”
“This unfortunate situation is largely the consequence of a difficult fiscal legacy and global economic factors,” he said.
“But it also reflects a series of mutually incompatible government choices and promises: sticking to a strict, quantified fiscal rule while leaving only the thinnest of margins; prioritizing public services and avoiding imposing a new cycle of austerity; not increasing public spending, the highest taxes, and not increasing taxes again after the autumn budget and only organizing one fiscal event per year. If interest rates higher If high levels wipe out the so-called ‘margin of safety,’ something will have to give,” Zaranko added.
