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UK inflation unexpectedly slowed to 2.5 percent in December as the economy weakened, easing pressure on Chancellor Rachel Reeves and paving the way for the Bank of England to continue cutting interest rates.
The consumer price index figure was below November’s 2.6 percent. Analysts had expected inflation to remain stable last month.
That will provide some relief to Reeves, who is struggling with higher borrowing costs fueled by fears that the UK economy could be entering a period of stagflation.
The Office for National Statistics report comes as the BoE’s Monetary Policy Committee prepares to hold its first meeting in 2025 early next month. Investors are betting that the central bank will cut rates by a quarter of a point to 4.5 percent.
The BoE estimated that the economy stagnated in the last quarter of 2024. Business surveys point to weaker confidence and employment, which could curb inflationary pressures.
Data on Wednesday showed that services sector inflation, closely watched by the BoE as a gauge of price pressures, slowed sharply to 4.4 percent from 5 percent previously.
Core inflation, which excludes food and energy, fell to 3.2 percent from 3.5 percent.
The pound weakened slightly after the data release, down 0.3 percent on the day to $1.218. Traders in the swaps market pegged a 60 percent chance of a quarter-point cut next month, according to levels before the data release.
The central bank cut its key rate to 4.75 percent in two quarter-point moves last year.
This is a developing story
Additional reporting by Ian Smith
