British Inflation Slows Unexpectedly

LONDON (Reuters) – British inflation unexpectedly slowed last month, with core measures of price growth – tracked by the Bank of England – falling more sharply, according to official data that will be welcomed by finance minister Rachel Reeves after a recent market selloff.

The annual rate of inflation eased to 2.5% in December from 2.6% in November, as reported by the Office for National Statistics.

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, had 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,” said Scott Gardner, investment strategist at J.P. Morgan-owned digital wealth manager Nutmeg.

Investors have sold British government bonds heavily in recent days, partly due to worries that inflation may be too high for the BoE to cut rates much this year, which could hurt 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 projected a smaller drop to 3.4%.

Services inflation stood at 4.4% in December – the lowest since March 2022 – compared with 5.0% a month earlier, according to the ONS. Economists had forecast it would dip only to 4.9%.

The BoE views both services and core inflation as better indicators 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,” said Luke Bartholomew, deputy chief economist at abrdn.