UK inflation unexpectedly dropped in December, fueling expectations of an interest rate cut next month.
Inflation edged up by 2.5% in the year leading to December, down from 2.6% in the previous month, marking the first decrease in inflation after three months.
The decline was propelled by a decrease in hotel prices and modest increases in airfares compared to standard rises, although prices are still escalating faster than the Bank of England's objective.
This alleviates pressure on Chancellor Rachel Reeves, who has come under scrutiny due to a depreciation in the pound's value and government borrowing expenses reaching the highest levels in several years.
"If the current trend continues, we may see some interest rate cuts," Michael Saunders, a former member of the Bank of England's monetary policy committee responsible for setting interest rates, informed the BBC.
Ruth Gregory, deputy chief UK economist at Capital Economics, remarked that the inflation data "strengthens the case" for a 4.5% cut next month. Investors are also growing confident about the likelihood of a reduction.
Compared to its peak in October 2022 when prices surged significantly, inflation is now much lower, elevating living costs for households and leading to higher interest rates, resulting in more expensive loans, credit cards, and mortgages.
Economists anticipated inflation to remain stable last month.
The Office for National Statistics (ONS) reported that a drop in price increases for dining out and falling hotel rates were key factors in driving inflation down.
Tobacco product prices, covering cigarettes, pouches, vape refills, and cigars, increased at a slower pace.
However, Grant Fitzner, chief economist at the ONS, noted that this was countered by the rising costs of fuel and used cars.
Following the data release, borrowing expenses reverted to the previous week's levels, and the pound slightly strengthened at $1.22.
Chancellor Reeves stated that there is still work required to assist families nationwide with the cost of living, adding that the government has acted to safeguard workers' pay from increased taxes while raising the minimum wage.
Meanwhile, shadow chancellor Mel Stride criticized the government for stalling economic growth and urged Reeves to clarify her strategies promptly.
In response to market instabilities, Reeves is anticipated to accelerate the unveiling of Labour's industrial strategy.
Investment director at Rathbones Investment Management, Jane Sydenham, mentioned on the BBC that investors need detailed insight into the UK's plans. She stressed the necessity for specific actions to appease the market.
Increased borrowing costs influence the government's tax and spending policies since more interest must be paid to service existing debts, reducing funds available for public services and investments.
Darren Jones, chief secretary to the Treasury, emphasized the need for public services to operate within their means, hinting at prioritization rather than imminent cuts.
Lastly, adjustments to business rates relief from April have led establishments like Ennio's, an Italian restaurant and small hotel in Southampton, to consider various cost-saving measures without resorting to cutting staff hours.