LONDON: British inflation unexpectedly slowed last month and core measures of price growth - tracked by the Bank of England - fell more sharply, according to official data that will be welcomed by finance minister Rachel Reeves after recent a market selloff.
The annual rate of inflation eased to 2.5% in December from 2.6% in November, the Office for National Statistics said.
Economists polled by Reuters had mostly expected a headline inflation reading of 2.6%.
The BoE - which will announce its next interest rate decision on Feb. 6 - forecast in early November that inflation would be 2.5% in December.
Sterling fell after the figures were published.
“Policymakers and Treasury officials will be breathing a small sigh of relief,” Scott Gardner, investment strategist at J.P. Morgan owned digital wealth manager Nutmeg, said.
Investors have sold British government bonds heavily in recent days, in part because they worry that inflation is likely to prove too high for the BoE to cut rates much this year, hurting economic growth and the government’s stretched finances.
Core inflation, which excludes energy, food, alcohol and tobacco prices, fell to 3.2% from 3.5% in November.
The Reuters poll had pointed to a smaller drop to 3.4%.
Services inflation stood at 4.4% in December - its lowest since March 2022 - compared with 5.0% a month earlier, the ONS said.
Economists had forecast it would dip only to 4.9%.
Further hike in UK inflation hits rate cut chance
The BoE looks at both services and core inflation as a better guide of underlying price pressures in the economy, especially those caused by persistent wage growth.
“For now, this slightly softer report should help reassure investors that the BoE can continue with its gradual easing cycle, and we expect the next rate cut in February,” Luke Bartholomew, deputy chief economist, abrdn, said.
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