Slowing Inflation Strengthens Calls For Bank Of England Rate Cuts

(RTTNews) - The unexpected softening of UK consumer price inflation at the end of 2024 added expectations for more interest rate reductions by the Bank of England this year.

The consumer price index registered an annual increase of 2.5 percent in December, weaker than the 2.6 percent gain in November, the Office for National Statistics said on Wednesday. The rate was expected to remain unchanged at 2.6 percent.

The CPI climbed 0.3 percent month-on-month, following a 0.1 percent rise in November. Prices were expected to gain 0.4 percent.

Excluding energy, food, alcohol, and tobacco, core inflation weakened to 3.2 percent in December from 3.5 percent in November. Core inflation was below economists' forecast of 3.4 percent.

Goods inflation rose to 0.7 percent from 0.4 percent. Meanwhile, services inflation fell to 4.4 percent from 5.0 percent due the sharp fall in airfares inflation.

Capital Economics' economist Ruth Gregory said the fall in inflation strengthens the case for a 25-basis points rate cut in February and lends some support to the assessment that rates will fall further and faster than markets expect. UK bond yields hit multiyear highs last week on concerns about the British economy as well as the financial position of the UK government. Although the surprise decline in inflation provides some timely respite amid the financial markets turmoil, any relief may be short lived as headline inflation is still decisively above the BoE's 2 percent target and also domestic and international inflation headwinds are growing.

"While these figures make a February interest rate cut more likely, concerns over the current market turbulence and heightened global inflation risks mean the decision of whether to loosen policy next month is not quite nailed on yet," ICAEW Economics Director Suren Thiru said.

Separate data from the ONS showed that input prices fell for the fifth straight month in December. Input prices dropped 1.5 percent annually after a 2.1 percent decline.

Meanwhile, the factory gate prices rose 0.1 percent after falling for three consecutive months. Prices were down 0.5 percent in November.

On a monthly basis, input prices edged up 0.1 percent compared to flat growth in November. Likewise, output prices gained 0.1 percent after November's 0.4 percent gain. Separately, the ONS said average house prices increased 3.3 percent to GBP 290,000. This compares to 3.0 percent rise in October.