Inflation unexpectedly falls to 2.5% in December

The rate of Consumer Price Index inflation unexpectedly fell one percentage point to 2.5% in December, dipping for the first time in three months, according to the Office for National Statistics (ONS). 

It comes as hotel prices fell and tobacco costs eased, which have been credited with helping offset a jump in the cost of fuel, as did a slowing in clothing and footwear inflation. 

While December’s rate of inflation still remained above the Bank of England’s 2% target, analysts expected it to remain unchanged at 2.6%. 

The latest figures have also eased pressure on chancellor Rachel Reeves, who has faced criticism following a slump in the pound’s value and government borrowing costs hitting the highest level for several years.

As a result of falling inflation, expectations of an interest rate cut of 0.25% next month have grown.

However, chief ONS economist, Grant Fitzner, warned that falling inflation does not mean prices are decreasing, but are “now rising at a slower pace”. 

Nevertheless, inflation is currently much lower than its peak in October 2022 when prices soared and pushed up the cost of living for households. This made loans, credit cards and mortgages more expensive. 

Last month, the Bank of England decided to hold interest rates at 4.75%, after policymakers said the UK economy had performed “worse than expected”. 

Interest rates are set to be reviewed again in February.