The ONS has reported this morning that UK CPI inflation for the year to December 2024 came in at 2.5% – slightly better than expectations – and below the 2.6% rate for November. The news will be a welcome relief for the Treasury as well as for all those hoping for an interest rate cut from the Bank of England early next month – although inflation remains well above it’s target rate of 2%.
In more good news this morning, core inflation is also on the way down – an area that’s been proving sticky and therefore quite a concern for market watchers in recent months.
There’s been plenty of reaction to today’s inflation news from across the industry, as follows:
Danni Hewson, AJ Bell head of financial analysis, comments: “After the ill winds which have buffeted UK financial markets over the past couple of weeks, today’s inflation figures will undoubtedly provide some welcome respite.
“Whilst at 2.5% inflation is still stubbornly above the Bank of England’s target, the fact headline CPI has come in below expectation and has even fallen a bit is cause for a degree of celebration. Markets have immediately seized on the numbers which will be the last inflation snapshot MPC members will get before they make their decision on whether to deliver an interest rate cut in February.
“From just 60% predicting a cut at the next meeting, expectation since the ONS figures were released has shot up to over 80% according to Refinitiv data and there is growing optimism that more cuts could be on the cards for 2025 than had been anticipated. A significant cooling in service sector inflation will have boosted the odds as central bankers have been rightly concerned about the impact of pay increases on this crucial cog in the UK’s economic wheel.
“But it’s important not to over egg this pudding and not to forget the potential for another inflation spike if businesses do pass on those extra costs coming their way in April as they have warned they will have to.
“There’s also the potential that global trade friction resulting from US tariffs could keep things volatile for the foreseeable future. And whilst rate cuts would be welcome, one of the reasons they’re likely to be considered is because of the weakness which seems embedded in the UK economy.
“The chancellor might have let out a sigh of relief this morning but she’s not off the hook yet and will need to follow through on the promise to properly lay out her growth plans if she’s going to win over markets.”
Commenting on the latest CPI data from the ONS, Abhi Chatterjee, Chief Investment Strategist at Dynamic Planner said:
“In a welcome relief to the beleaguered government, inflation, as measured by the CPI, came in at 2.5% till December 2024, down from 2.6% in November. On a monthly basis, CPI rose by 0.3% in December, compared to the 0.4% in November. The better news is it came in lower than was expected by the street, which expected no change.
“While there will be a rush to put forward the positives, one should always remember that this is just one reading of an indicator and should be taken as it is. What is more important is the trend of the CPI Index, which over time has tended to be stickier than expected. In addition to the word that the current budget proposals of investment for growth could possibly be inflationary has resulted in the Gilt markets to sell off, as participants slowly scratch off the number of expected rate cuts. While there has been no significant change in fundamentals, both in government and Bank of England policy, it seems that the markets, having driven the pricing to unwarranted levels, is now upset about the correction that invariably occurs. The BoE is already in a holding pattern and this new print does not appear to do anything to change it.”
Sarah Pennells, Consumer Finance Specialist at Royal London said:
“While many consumers may be pleased to see a slowdown in headline inflation figures, it’s too early to say whether this month’s fall marks the restarting of the downward trend we saw last year, or if it’s a short-term blip.
“Royal London cost of living research shows that, even though inflation fell from its rate of 4% a year earlier, almost nine out of ten adults are worried about rising energy costs and eight in ten about higher food bills.
“The rate of inflation is nowhere near the record highs experienced in 2022, but the current inflationary environment continues to put pressure on consumers. Our data shows one in five adults are overdrawn at the end of the month, either regularly or from time to time, and one in ten say they couldn’t afford any unexpected bill- no matter how small – from either their savings or income.”
Jonny Black, chief commercial and strategy officer at abrdn adviser, said: “This will be welcome news, but it doesn’t mean inflation won’t be something to watch in 2025.
“A volatile economic landscape is making it hard to say for sure where inflation is going to go next, but the Bank of England’s own forecast suggests that it could stay stubbornly above the 2% target for 2025-26.
“This means it will continue to be essential for savers and investors to factor price rises into their financial plans and consider ways to mitigate the impact of inflation on their money, including through investing. Advisers will continue to play a critical role in helping clients stay on track.”
Ed Monk, Associate Director, Fidelity International, comments: “The slight dip in inflation in December is good news and revives hopes that expected rate cuts can still come through this year. The market view of where rates will land has been shifting, with one fewer rate cut now expected in 2025 than was the case a month ago. Markets ahead of the inflation print were suggesting another two cuts this year. Today’s reading keeps that on track for now.
“But it doesn’t remove the dilemma for the Bank of England or Downing Street. Inflation is stubbornly above target while growth has begun to slowdown – that’s the path to ‘stagflation’. GDP numbers for November, due on Friday, will tell us more about whether the economy shrank overall in the final quarter of 2024. Higher rates are restricting economic activity, but the Bank clearly still fears any loosening of borrowing cost could let price rises accelerate, heaping yet more pressure on households.
“None of this is good news for UK investors. UK shares look cheap versus other regions but they need a catalyst to rerate higher. Inflation may have to come down further and growth will have to pick up for that to happen.”
Daniel Casali, Chief Investment Strategist at wealth manager Evelyn Partners, commented:
“While the December inflation data came in below economists’ expectations it remains stubbornly high and is expected by the Bank of England (BoE) to accelerate a little over the course of 2025.
“In the data, services CPI inflation remains elevated at 4.4% year-over-year, about twice the rate it was in December 2019, before the pandemic. Within services, there are still pockets of inflation, like rents in the housing category, which are running north of 7% per year. Outside of services, goods CPI inflation came in at 0.7% year-on-year and remains a drag on the overall rate of inflation.
“Looking further on, the UK inflation trajectory will be complicated by the demand boost from the budget at the end of October after the government relaxed fiscal rules. The hike in the National Minimum Wage and Employers National Insurance (both from April) and its impact on encouraging “producers to raise prices to maintain profit margins is another consideration for the BoE. Rising crude oil prices, where Brent has now moved north of $80/barrel, its highest level since last summer, is also worth monitoring as a source of inflation.
“The next opportunity for the BoE to cut interest rates is at the 6 February meeting. The future markets largely expect the BoE to lower rates by 25bps to 4.5% at this meeting.
“Potentially, sticky inflation may lead to the BoE taking a more modest approach in cutting interest rates over the course of 2025. This comes at a time when confidence in the gilt market appears fragile, with the 10-year yield trading at 4.9%, its highest level since the Global Financial Crisis in 2008. A key test for the gilt market is when the Office of Budget Responsibility publishes its economic outlook for the UK and public finances in its 26 March Spring forecast. If economic growth is revised lower, the government may need to raise taxes and/or cut spending to meet its fiscal projections and ensure its credibility with the gilt market.
“Despite the volatility seen in the gilt market, the UK equity market has been resilient and is up slightly year-to-date. That’s largely due to relatively solid global economic growth, policy easing and technological innovation lifting most developed equity markets. A weaker sterling exchange rate against the dollar may also help UK stocks as dollar-denominated earnings from overseas are repatriated back home.”
Lindsay James, investment strategist at Quilter Investors said: “CPI data for December shows a modest easing in price pressure, with headline inflation falling to 2.5% from 2.6% the previous month. This rounds off a year marked by a resurgence of inflationary forces in its latter stages, prompting the Bank of England to diverge from the ECB and the Federal Reserve by keeping interest rates flat at 4.75% during the December meeting.
“The month-on-month rate accelerated to 0.3% from 0.1% in November, while core inflation, which strips out volatile food and energy prices, ticked down more convincingly to 3.2%, from 3.5% in the prior month.
“The primary drivers of inflation in December were rising costs for transportation, household services, whilst clothing, restaurants and hotels saw a downward contribution.
“Services inflation, which stood at 4.4%, down from 5% in November, remains a major focus as wage inflation stays well above the 2% target. Employers’ responses to the autumn budget suggest that cuts to headcount and price hikes are the most likely outcomes. While these measures may eventually dampen wage inflation, in the near term, public sector pay rises of around 5-6%, combined with ongoing labour shortages in parts of the service economy, continue to drive elevated levels of wage growth. With wages accounting for around 60% of the costs within the service sector, this remains a significant obstacle to further interest rate cuts.
“At its December meeting, the Bank of England also highlighted rising risks from geopolitical tensions and trade policy uncertainty. With energy prices increasing due to further pressure on European gas supplies amidst a cold weather snap and ongoing global trade frictions, it is unsurprising that consumers are raising their inflation expectations in the year ahead. This shift in expectations can alter consumer spending decisions and become a more potent driver of future inflation.
“Markets are now sceptical about the prospect of further rate cuts in the UK before May, pricing in less than two quarter-point cuts for the year as a whole. While this data will show some encouraging signs of progress, much of this is negated once mortgage costs are factored in with CPIH, the CPI index including owner occupiers’ housing costs, remaining unchanged at an annual rate of 3.5%. With government bond yields rising in recent weeks, the upward pressure on mortgages remains in place. Consequently, the UK economy is unlikely to experience interest rate cuts in the near term, adding to the headaches at the Treasury as growth is likely to remain anaemic.
“While the most likely outcome remains weak growth and slowing inflationary pressure as we move through the year, the increasing frailty to the UK economy suggests that the risk of recession, though still modest, appears to be increasing.”
John Phillips, CEO of Just Mortgages and Spicerhaart, said: “News of a slight drop in inflation is certainly a surprise and contradicts the expectations of the markets and many analysts. This will no doubt be welcome news for ministers – not least the Chancellor who faces considerable pressure as uncertainty rips through the UK financial markets.
“How likely the UK is able to sustain this slowing in inflation is still up for debate, especially given the fallout from the recent Budget and the implications for businesses, as well as the growing prospect of US tariffs days away from Trump’s inauguration. All have had an impact on market expectations with rising gilt yields and government borrowing costs.
“The Bank of England stands at a crossroads between managing sticky inflation and supporting economic growth. The latter cannot be understated given growing fears of stagflation. A slight reprieve or not, will a surprise slowing of inflation encourage the central bank to act faster than perhaps many are expecting – giving hope to those wanting to see further movement on interest rates.
“Either way, a remedy is clearly needed to help kickstart economic growth. In our world, we have seen a really positive start to the new year with high levels of buyer registrations and mortgage enquiries. If the MPC is able to respond to this positive news at its first meeting next month, that will certainly help sustain this.
Paresh Raja, CEO of Market Financial Solutions, said: “This is good news, and comes despite predictions of another small rise. However, the fact that inflation is proving sticky, remaining above 2%, is still likely to fuel arguments that the Bank of England will, or should, delay cutting the base rate. But I believe it’s still too early to make definitive predictions. We need to consider the broader context: inflation fluctuates by a few percentage points each month, and following significant fiscal events like the Autumn Budget and the lead-up to the busy Christmas period, inflation hovering above the 2% target was always a possibility.
“The key focus now shouldn’t be on whether the BoE cuts the base rate at its next meeting or even the one after that. This attitude actually creates hesitancy, encouraging a ‘wait and see’ approach. Instead, as an industry, we need to continue adapting to the current lending landscape and ensure that brokers and borrowers have the support they need to execute their plans effectively. While we may not see a return to lower rates as quickly as some might have hoped should inflation remain above 2%, the market has demonstrated resilience through far tougher conditions in recent years, which is important to keep in mind.
“We’ve already observed positive signs of growth in the early months of this year, particularly when it comes to house prices and buyer demand. So, if lenders can tailor their offerings to meet their clients’ needs, there’s every reason to remain optimistic about the outlook for the months ahead.”
Tomasz Wieladek, chief European economist at T. Rowe Price said: “UK headline CPI inflation fell to 2.5% in December, down from 2.6% in November and below the consensus of 2.6%. Core CPI inflation fell to 3.2% from 3.5%, also below consensus. Services inflation fell to 4.4% from 5%, mainly driven by interest rate-sensitive categories. The most important factors contributing to the decline were hotels, restaurants, and recreation – all categories which reflect domestic price pressures. Importantly, services inflation came in significantly below the 4.8% consensus.
“These data challenge the idea that the MPC will only cut less than twice this year, as market pricing suggests. Four to five cuts are more likely. Headline inflation will be dominated by energy base effects for now, but today’s decline in services shows underlying inflation is also finally declining. It remains to be seen if this pace of underlying disinflation can be maintained, but overall, the data today are a clear green light for another series of cuts.
“The MPC has repeatedly said services inflation will be an important indicator in understanding if domestically generated inflation is coming down in a sustainable manner. Today’s reading of 4.4% shows services inflation is finally on the way down, and that the bank rate is significantly above the neutral rate. These data will support those MPC members who are convinced the MPC should continue to cut.
“Labour market surveys are also clearly weakening at the moment. Without reliable official data, the only conclusion is that economic conditions will support lower wage growth and inflation going forward. This will allow the MPC to cut rates four to five times this year – significantly more than market pricing.
“Gilt yields, especially at the front end of the curve, should start decoupling from the recent US-driven sell-off. The long end of the gilt curve tends to be driven by international factors. However, the two-year gilt is typically anchored by monetary policy. Today’s data show a very different economic path in the UK than in the US. Gilt yields, especially at the short end of the curve, should start reflecting this. They will likely be less responsive to further US sell-offs going forward.”
