UK inflation unexpectedly eased for the first time in three months in December after falling hotel prices and easing tobacco prices.
The Office for National Statistics (ONS) said prices rose by 2.5 per cent over the year in December, down from 2.6 per cent a month earlier.
Expectations for an interest rate cut next month have risen, despite inflation remaining above the Bank of England’s target.
The latest figures also eased pressure on Chancellor Rachel Reeves, who has faced criticism after the pound weakened and the government’s borrowing costs hit a multi-year high.
On Wednesday morning, government borrowing costs fell from their recent highs, as traders reacted to an unexpected drop in inflation.
Grant Fitzner, ONS chief economist, said hotel prices fell last month, but the decline was offset by increases in fuel prices and second-hand cars.
He added that tobacco prices also rose less than in December 2023, which was a factor in the decline in the overall rate of inflation.
Falling inflation does not mean prices are falling, but are now rising at a slower pace.
But economists had expected inflation to hold steady last month, so the falling rate would be welcome news for Reeves, who has hit back at critics and called for an improvement in Britain’s stagnant economic growth. Pledged to go “further and faster” – the government’s top priority.
He said there was “still work to do to help families across the country with the cost of living” after the inflation figures were announced, but added that the government had “paid more for working people”. “has taken action to protect wages from higher taxes” and raised the minimum wage. .
“We were clear that growth is our top priority to put more money in the pockets of working people,” he said.
But shadow chancellor Mel Stride said economic growth had been “stoned to death by this government”.
Michael Saunders, a former member of the Bank of England’s monetary policy committee, which sets interest rates, said the latest inflation data would be “somewhat helpful” in trying to ease some worries about UK interest rates. .
“If it stays the way it is, we’ll be on track for a bit more interest rate cuts,” he told the BBC’s Today programme.
The Bank of England decided to keep interest rates at 4.75 percent last month, after policymakers said the UK economy performed worse than expected, with no growth between October and December.
It will set rates next February, but inflation is above the bank’s 2% target.
However, Ruth Gregory, deputy chief UK economist at Capital Economics, said the expected inflation rate for December “strengthens the case” for a 0.25 percentage point cut next month.
But there are concerns that inflation could rise further, with firms warning that they will raise prices to cover tax hikes that take effect in April and the threat of possible trade tariffs from U.S. President-elect Donald Trump. Trump has promised a 20 percent tariff on all. Imports
High inflation raises the cost of living for households, and can lead to higher interest rates, making loans, credit cards and mortgages more expensive.
Jonny Gettings, director of operations at Italian restaurant and small hotel Anio in Southampton, told the BBC that the hospitality business was facing a number of rising costs, from produce and ingredients to staff wages and utility bills.
He said the outlook for business looked “quite bleak” with increases in the minimum wage and national insurance contributions and cuts to business rates relief starting in April.
“It will undoubtedly have a significant impact on the way we operate our business,” he said. “Our staff are our greatest asset and the concern is that the balancing act is ensuring that we do not impact their future employment.
Mr Gittings said cutting his staff’s working hours would be the “last view” the business would see, adding that he would consider shrinking menu sizes, reviewing suppliers or opening restaurant hours. Can consider changing.
“As soon as you raise prices, you have another problem to deal with, because then the problem is that customers will vote with their feet and they will go and eat elsewhere.
“You can only charge so much for one menu item before the guest says, OK, wait a minute.”
In response to the turmoil in the markets in recent days, it is understood that the chancellor will now bring out announcements from Labour’s promised industrial strategy within the next two weeks.
Jane Syndenham, director of investments at Rathbones Investment Management, said investors appeared to have “kind of shrugged off” Reeves’ comments on Tuesday.
“We just need to see some detail – will there be some tax breaks for certain industries? I think the details and the action is what the market wants to see.”
Early on Tuesday, the pound rose slightly to $1.22. Ms Sandenham said a weaker pound signaled a “lack of confidence” in the UK economy.