UK inflation lowers to 2.5% in December

Down from 2.6% in November

The UK Consumer Prices Index (CPI) dropped to 2.5% in December, below FactSet’s consensus of 2.8% for the month.

According to data from the Office for National Statistics today (15 January), the downward trend was driven by restaurants and hotels, with the latter recording a 1.9% decline in prices over the month, as opposed to a rise of 3.1% in December 2023.

The CPI index was down from 2.6% in the 12 months to November, however, it rose by 0.3% on a monthly basis.

Core CPI – excluding energy, food, alcohol, and tobacco – was up 3.2% in the 12 months to December 2024, 0.3 percentage points lower than in November (3.5%).

Meanwhile, the CPI annual rate for goods rose from 0.4% to 0.7%, while the CPI services rate fell from 5% to 4.4%.

Quilter Investors investment strategist Lindsay James said services inflation remains a “major focus” as wage inflation still hovers above the 2% target.

“Employers’ responses to the Autumn Budget suggest that cuts to headcount and price hikes are the most likely outcomes. While these measures may eventually dampen wage inflation, in the near term, public sector pay rises of around 5-6%, combined with ongoing labour shortages in parts of the service economy, continue to drive elevated levels of wage growth,” James continued.

Chancellor Rachel Reeves noted “there is still work to be done” to help families across the UK cope with the cost of living.

“That is why the government has taken action to protect working people’s payslips from higher taxes, frozen fuel duty and boosted the national minimum wage,” she said. “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.”

As far as rate cuts are concerned, James said markets are now doubtful about whether the Bank of England will make a move before May.

“While this data will show some encouraging signs of progress, much of this is negated once mortgage costs are factored in with CPIH, the CPI index including owner occupiers’ housing costs, remaining unchanged at an annual rate of 3.5%,” Quilter’s investment analyst said.

With government bond yields rising in recent weeks, the upward pressure on mortgages remains in place.

“Consequently, the UK economy is unlikely to experience interest rate cuts in the near term, adding to the headaches at the Treasury as growth is likely to remain anaemic,” James added.

Sorin-Andrei Dojan (Professional Adviser)

Retirement ProfessionalsUK inflation lowers to 2.5% in December