LONDON — U.K. inflation fell to a lower-than-expected 2.5% in December, according to data released by the Office for National Statistics on Wednesday.
The consumer price index (CPI) rose to 2.6% in November, with economists polled by Reuters expecting the December reading to stay unchanged.
Core inflation, which excludes more volatile food and energy prices, came in at 3.2% in the twelve months to December, down from 3.5% in November.
The U.K.’s inflation rate had hit a more than three-year low of 1.7% in September, with monthly prices picking up since on the back of higher fuel costs and of services fees rising rising faster than the price of goods. In December, the annual services inflation rate stood at 4.4%, down from 5% in November.
The British pound was down 0.3% against the dollar at 07:15 a.m. London time, shortly after the release.
The data will be food for thought for the Bank of England ahead of its next meeting on Feb.6, at which the central bank is expected to cut the key interest rate from 4.75% to 4.5%, despite inflationary pressures, such as resilient wage growth and uncertainty over Britain’s economic outlook.
The U.K. economy has found itself in a tight spot of late, with economists voicing concerns over the country’s sluggish growth prospects and worries over headwinds caused by both external factors, such as potential trade tariffs once President-elect Donald Trump takes office, and internal fiscal and economic challenges that have dogged the Labour government and Treasury since the October budget.
Tax rises announced by the government last fall, which are due to come into effect in April, have caused consternation among British businesses that warn that investment, hiring and growth will be stunted.
The U.K. also saw its borrowing costs and currency weaken amid jitters over the country’s economic outlook and fiscal plans, posing a dilemma for Finance Minister Rachel Reeves’s ambitions to balance the budget.
Reeves has vowed to keep to self-imposed fiscal rules to make sure all day-to-day spending is met from revenues and that government debt is on a downward trend. She could now be forced to decide whether to tweak or break these restrictions.
The choice she faces is to do nothing and hope that unfavorable borrowing conditions subside, to hike taxes further — a move likely to elicit more criticism from businesses and the public — or to cut public spending, a step that is already mooted by the government but goes against Labour’s anti-“austerity” position. Last weekend, Reeves said the fiscal rules laid out in the budget were “non-negotiable,” adding that “economic stability is the bedrock for economic growth and prosperity.”
Ben Zaranko, associate director at the Institute for Fiscal Studies, said Reeves faces “a rather unenviable set of options.”
“This unfortunate predicament is largely the consequence of a difficult fiscal inheritance and global economic factors,” he said in comment.
“But it also reflects a series of government choices and mutually incompatible promises: to stick to a hard, numerical fiscal rule while leaving only the finest of margins against it; to prioritise public services and avoid imposing another round of austerity; not to raise the biggest taxes, and not to raise taxes again after the Autumn Budget; and to hold only one fiscal event per year. If higher interest rates wipe out the so called ‘headroom’, something will have to give,” Zaranko added.