Dip in UK inflation will come as a relief and opens way for interest rate cut
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Unexpected fall last month should help ease fears inside Treasury and Bank of England after bond market sell-off. December’s unexpected decline in the inflation rate, to 2.5%, is a fillip for the chancellor, Rachel Reeves, opening the way for an interest rate cut next month.
While much of the bond market sell-off in recent days has been driven by global concerns, part of it related to fears that the UK was sliding towards “stagflation” – a nasty combination of slow growth and sticky prices. December’s consumer price index (CPI) reading of 2.5%, down from 2.6% in November, suggests inflation is moving in the right direction.
That should help to calm the fears of policymakers on the Bank of England’s nine-member monetary policy committee that, with wages growing relatively strongly, inflation could prove difficult to wrestle back to its 2% target. In particular, core inflation, which strips out the volatile elements of energy, food, alcohol and tobacco, declined to 3.2% in December, down from 3.5% a month earlier.
These domestically generated price increases are the ones the Bank tends to fret about the most. The cost of a night out or a weekend away in December seems to have been a key part of the picture: the Office for National Statistics singled out hotels and restaurants as a driver of the slide in the CPI.
