Market Data

UK inflation falls to 2.5% in December

Share

The UK inflation rate took an unexpected dip in December 2024, marking the first decline in three months, according to the Office for National Statistics (ONS). The Consumer Prices Index (CPI) rose by 2.5% in the 12 months to December, down from 2.6% in November, and significantly below the peak of 11.1% recorded in October 2022.

This decrease was driven by reduced price pressures in key sectors such as restaurants, hotels, and tobacco, along with easing costs for air travel. Monthly inflation also decelerated, with a 0.3% rise compared to 0.4% in December 2023.

The hospitality sector played a major role in December’s decline. The annual inflation rate for restaurants and hotels dropped to 3.4%, its lowest since July 2021, down from 4.0% in November. Hotel prices, in particular, fell by 1.9% on the month, in stark contrast to a 3.1% rise recorded a year ago.

While hospitality costs softened, the transportation sector exerted upward pressure on inflation. Higher prices for motor fuels and secondhand cars partially offset the overall decline. However, air travel prices, a significant contributor to inflation in November, eased in December, helping bring down the overall CPI rate.

The dip in inflation provides a measure of relief for Chancellor Rachel Reeves, who has faced mounting criticism over economic challenges, including a decline in the value of the pound and surging government borrowing costs. The new figures may also reduce pressure on the Bank of England, which has struggled to balance economic growth with its 2% inflation target.

Despite inflation remaining above the Bank’s target, the easing price pressures have fuelled speculation of a potential interest rate cut in February. Lower inflation may encourage policymakers to prioritise growth, particularly as the UK economy grapples with ongoing global uncertainties and domestic economic strains.

The broader services sector, which constitutes around 80% of the UK economy, also saw inflation ease. The CPIH all services index, which measures consumer prices including owner-occupiers’ housing costs, rose by 5.4% in the year to December, down from 5.7% in November. This is the lowest annual rate since January 2023 and reflects easing pressures across various services, including passenger transport by air.

While the inflation figures offer optimism, challenges remain. Upward price pressures from key goods and transportation suggest inflationary risks are not fully abated. For now, the December dip in inflation signals some progress in stabilising the UK economy after a turbulent period.

Industry comment

rudge neil 400

Neil Rudge, chief banking officer for Commercial at Shawbrook, commented: “After a week of disappointing economic news, a slight fall in the rate of inflation will provide a much-needed boost to UK businesses this month.

“Sticker than expected interest rates will be playing on SME owners’ minds however, as many will have been hoping for a more dramatic fall in borrowing costs in 2025 than is now predicted to occur.

“With National Insurance changes taking effect from April, managing costs will remain at the forefront . Businesses will be considering their finance options in order to manage costs, maintain cash flow and continue to invest in their business. Specialist finance has a role to play in supporting small and medium sized businesses through this period, helping to manage these challenging economic headwinds and drive growth.”

Mike Randall, CEO at Simply Asset Finance, said: “With inflation holding steady, SMEs will feel a lukewarm start to the year, casting doubt on the much-anticipated interest rate cut to warm the economic climate and kick-start 2025.

“For businesses, this news may feel like confirmation of their fears, as many consider price adjustments ahead of April when living wage and national insurance increases come into effect. Despite this, many still show optimism for growth. Almost a fifth of SMEs we recently surveyed (19%) said they were more inclined to invest in their businesses following greater clarity on the government’s economic roadmap. Additionally, 43% expressed optimism about infrastructure improvements announced by the Chancellor.

“The full extent of the Government’s plan remains to be seen, but it is vital that we support this dedication to growth. This will ultimately form the backbone of the UK economy’s recovery, and steer us towards meaningful growth.”