UK inflation dips, easing some pressure on government

Britain’s annual inflation rate fell unexpectedly to 2.5 percent in December, down from 2.6 percent the previous month, according to official data released Wednesday by the Office for National Statistics (ONS). This slight dip offers some relief to the Labour government amid growing economic concerns.

Analysts had predicted the Consumer Prices Index (CPI) would remain unchanged from November’s figure. The ONS attributed the drop to lower hotel prices and a slower rise in tobacco costs compared to the previous year. “Inflation eased very slightly as hotel prices dipped after rising in December 2023,” said Grant Fitzner, chief ONS economist. “The cost of tobacco was another downward driver, as prices increased less than a year earlier,” he added. However, Fitzner noted that rising fuel prices and a rebound in the cost of second-hand cars, marking their first annual increase since July 2023, partially offset the decline.

On a monthly basis, the CPI rose 0.3 percent in December, slightly lower than the 0.4 percent increase recorded a year earlier. Core CPI, which excludes energy, food, alcohol, and tobacco, also dropped, rising 3.2 percent in the 12 months to December compared to 3.5 percent in November.

The inflation data was released just a day after UK finance minister Rachel Reeves faced scrutiny in parliament over the government’s handling of the economy. Reeves acknowledged the need to “go further and faster” to boost economic growth amid rising state borrowing costs and a sharp decline in the value of the pound.

In a tense parliamentary session, the opposition Conservative Party renewed calls for Reeves to resign, criticizing her handling of economic policies. Despite this, Prime Minister Keir Starmer expressed full support for the chancellor.

Adding to the economic strain, UK 10-year bond yields, a key measure of market confidence, recently surged to their highest level since the 2008 global financial crisis, putting additional pressure on the government’s fiscal policies. This spike may compel the government to consider spending cuts and further tax hikes.

Reeves’ first budget in October introduced tax increases on businesses, a move widely blamed for Britain’s sluggish economic growth in recent months.