In surprising news, annual inflation dropped to 2.5% in December. Find out more about what this could mean for future interest rates and your finances.
The latest inflation data is in, and December brought some unexpected news. Consumer Prices Index (CPI) inflation slowed to an annual rate of 2.5%, down slightly from 2.6% in November, according to the Office for National Statistics (ONS). While still above the Bank of England’s target of 2%, this decline offers some relief.
December’s inflation report highlighted some key figures:
- Annual Inflation Rate: 2.5%, down from 2.6% in November.
- Monthly Consumer Price Index (CPI): Rose by 0.3%, a slight slowdown compared to 0.4% in December 2023.
- Core Inflation (excluding volatile items like energy, food, alcohol and tobacco): Rose by 3.2%, down from 3.5% in November.
This unexpected dip caught economists off guard, as many had predicted inflation holding steady at 2.6% for the month.
Why the drop?
The modest drop in inflation reflects a combination of factors:
Lower core inflation – A notable drop in core inflation suggests easing price pressures in areas like goods and services.
Improved energy stability – Seasonal fluctuations in energy prices have moderated somewhat, though this stability may be short-lived with April’s Ofgem energy price cap changes looming.
Evolving market conditions – Global supply chain adjustments and shifts in consumer demand following the holiday period may have contributed to cooling pressures in specific sectors.
What happens next?
While encouraging news, this doesn’t guarantee a sustained downward trend, given continuing global inflationary pressures and domestic challenges.
Inflation still remains above the Bank of England’s target. However, financial analysts are now more optimistic about the chances of a base rate reduction in the Bank of England’s next review on 6 February.
Lower interest rates could provide much-needed relief for businesses and consumers. However, these bets depend on inflation not rebounding significantly in the months ahead.
While the data may ease some pressure on Chancellor Rachel Reeves, her fiscal challenges are far from over. Government borrowing costs have surged this year amid concerns about inflation.
Although the unexpected drop in inflation may offer temporary relief, persistent inflation rates – especially in core categories – continue to weigh on household budgets and business costs.
Energy price cap
While December’s inflation report offers a glimmer of optimism, challenges remain. April’s anticipated rise in the energy price cap could push inflation rates back above 3%, further complicating efforts to manage public finances and counteract the cost-of-living squeeze.