According to the latest figures by the Office for National Statistics (ONS) inflation fell slightly from 2.6% in November to 2.5% in December.
The small fall in inflation in December is a rare piece of good news on the UK economy. Crucially, it is broadly in line with the Bank of England’s forecasts, allowing interest rates to be cut further.
The Bank will especially welcome the fall in services inflation, because this is where any upside risks from a tight labour market might show up.
Of course, this is before the increases in employer’s NI and minimum wages actually take place in April. Energy price inflation is also set to pick up.
However, the Bank of England already expects inflation to increase to around 2.75% by the second half of 2025, and yet was still willing to cut rates in November.
With monetary growth subdued, economic activity stalling, and the labour market weakening sharply, the Bank should cut rates again in February and keep cutting throughout the year.
The OBR had already factored in more cuts in interest rates in the forecasts for the October Budget, so the direct impact on the public finances may be limited. But further cuts would still be positive for confidence in the economy and in the markets, which is (almost) everything at the moment.
