The decline, driven by a slowdown in service sector prices, marks a departure from two months of rising inflation. Analysts had anticipated the rate to hold steady at 2.6%, making the drop a surprise development.
According to the Office for National Statistics (ONS), service sector inflation fell to 4.4% in December, its lowest level since March 2022, compared to 5% in November. Economists had predicted a more modest drop to 4.9%.
Grant Fitzner, chief economist at the ONS reported that hotel prices contributed significantly to this month’s decline, while fuel and used car costs showed their first annual growth since July 2023.
Core inflation, excluding volatile items such as energy and food, also eased to 3.2% in December from 3.5% in November, aligning with the Bank of England’s focus on underlying price pressures.
Chancellor of the Exchequer Rachel Reeves welcomed the slight decrease in inflation but emphasized the need for continued action to support households.
She stated that there is still work to do to help families afford the cost of living and reassured why the government has taken steps to protect workers’ wages, freeze fuel duty, and raise the national minimum wage.
The Bank of England, set to announce its next interest rate decision on February 6, had forecasted inflation to reach 2.5% in December. While the figure aligns with expectations, it remains above the BoE’s 2% target.
Ed Monk, associate director at Fidelity, noted that the decline offers cautious optimism as slight drop in December raises hopes that the anticipated rate cuts this year can materialize.
