UK inflation falls throwing Reeves a lifeline

UK inflation fell to 2.5% in December as service inflation fell amid a cooling of the economy just as the media started questioning how long Rachel Reeves has left before Starmer gives her the boot.

The chancellor has been thrown a lifeline in the form of falling inflation, which will help settle financial markets and ease the pressure on government debt.

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The reading of 2.5% CPI inflation in December is a reduction from 2.6% in November.

“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,” said Scott Gardner, investment strategist at Nutmeg.

“While it might be odd to be welcoming above target inflation, these results have grown in significance after an unstable start to the year for the pound and government borrowing. In the lead up to this release, it was clear that markets could not afford any surprises after a troubling period which saw UK assets hit by fears of low economic growth and persistent inflation. This data will hopefully allay some of those concerns.”

Interest rate traders quickly priced in more interest rate cuts by the Bank of England this year, which followed through into a rally in interest rate-sensitive equities in early trade.

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Falling core inflation, one of the most closely watched metrics by the Bank of England, alleviated some fears UK borrowing rates would remain elevated for most of this year.

“Most importantly for the BoE, core CPI fell and services inflation cooled down to lowest since March 2022,” said Lale Akoner, Global Market Analyst at investment platform eToro.

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