UK inflation drops to 2.5% – but remains above Bank of England target (Image: Getty)
UK marginally fell in the year to December but remained stubbornly above the s 2% target.
Consumer Prices Index (CPI) inflation rose to 2.5% in the 12 months to December, down from 2.6% the previous month, the Office for National Statistics (ONS) has said.
The ONS attributed December’s slight drop to lower hotel prices and a smaller increase in tobacco costs compared to the previous year, though higher fuel and second-hand car prices provided some upward pressure.
Grant Fitzner, chief economist at ONS, said: “Inflation eased very slightly as hotel prices dipped this month but rose a year ago. The cost of tobacco was another downward driver, as prices increased by less than this time last year.”
He added: “This was partly offset by the cost of fuel and also second-hand cars, which saw their first annual growth since July 2023.”
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Rachel Reeves said she would “fight every day” to improve people’s living standards. (Image: Getty)
Economists anticipate a “temporary reprieve” before price rises pick up pace this year. They expect price pressures to build from 2025 with inflation forecast to reach 3.2% in April.
Sanjay Raja, a senior economist for Deutsche Bank, said: “Looking ahead, price momentum will only pick up from here.
“Increases to the National Living Wage and employer national insurance contributions will, we expect, push inflation higher over 2025. Higher energy prices won’t help either, nor will higher food prices, which are starting to emerge.”
Responding to the surprise drop, Chancellor of the Exchequer said she would “fight every day” to improve people’s living standards.
She said: “There is still work to be done to help families across the country with the . 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.
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“In our plan for change, we were clear that growth is our number one priority to put more money in the pockets of working people. I will fight every day to deliver that growth and improve living standards in every part of the UK.”
While inflation remains higher than the target of 2%, markets still anticipate the Bank of England reducing in February.
Scott Gardner, investment strategist at digital wealth manager Nutmeg, said: “Policymakers and treasury officials will be breathing a small sigh of relief as new data shows that inflation fell during the final month of 2024, beating market expectations.
“This data will increase the chances that the Bank of England cuts in February, though the path remains murky for multiple cuts this year.”
Ed Monk, associate director at Fidelity International, said: “Inflation is stubbornly above target while growth has begun to slowdown – that’s the path to ‘stagflation’.”
He added: “The market view of where rates will land has been shifting, with one fewer rate cut now expected in 2025 than was the case a month ago. Markets ahead of the inflation print were suggesting another two cuts this year. Today’s reading keeps that on track for now.”
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