Surprise fall in inflation to 2.5%

Data from the Office for National Statistics (ONS) shows inflation in December slowed slightly to 2.5%.

This means prices increased slower in December than in November when inflation increased to 2.6%—the highest it’s been since March.

The fall was unexpected, with economists predicting it would remain flat at 2.6%.

The figures show core inflation, which doesn’t include energy, food, alcohol, and tobacco, fell sharply to 3.2% from 3.5% in November.

And despite economists predicting services inflation remaining high at 4.9%, it fell to 4.4%, down from 5% in November.

Both core and services inflation are important as the Bank of England looks at these closely when deciding what to do with interest rates.

When it last met in December, the BoE Monetary Policy Committee chose to freeze interest rates at 4.75%. However, economists are now more positive that a cut will come next month, with inflation starting to tick back down toward its 2% target.

Grant Fitzner, the ONS's chief economist, said, “Inflation eased very slightly as hotel prices dipped this most but rose a year ago.

“The cost of tobacco was another downward driver, as prices increased less than this time last year.

“This was partly offset by the cost of fuel and also second-hand cars, which saw their first annual growth since July 2023.”

The drop in inflation will be warmly welcomed by the government. Chancellor Rachel Reeves was under pressure after the pound fell and government borrowing costs hit their highest level for several years following October’s Budget.

What is inflation and how is it measured?

Inflation is a measure of price rises for goods and services over time. The Office for National Statistics measures inflation by tracking the prices of hundreds of everyday items in an imaginary shopping basket. Each month’s inflation figure shows how much the price of this basket of goods has risen in the space of a year.

Are inflation and interest rates linked?

When inflation rates rise too much, the Bank of England increases the base rate to help bring it back under control. This base rate influences the interest rates banks and lenders offer you. When inflation is higher, borrowing becomes more expensive. This means people have less money to spend elsewhere. Demand and prices are brought down when people spend less, lowering inflation.