- CPI falls to 2.5%, down from 2.6% and below expectation
- Service sector inflation eases significantly to 4.4% as hotel prices fall
- Market expectation of a February rate cut by the Bank of England rises in response
Danni Hewson, AJ Bell head of financial analysis, comments on the latest UK inflation figures:
“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.”
