UK inflation falls to 2.5% in December, easing pressure on Rachel

A surprise dip in the Consumer Prices Index to 2.5% in December—down from 2.6% in November and below analyst forecasts—gave Chancellor Rachel Reeves a brief reprieve and nudged gilt yields lower.

Inflation data and market reaction

The Office for National Statistics reported that headline CPI inflation slowed to 2.5% in December, a modest decline from 2.6% in November and a surprise to analysts who had expected the rate to hold steady or edge higher [1]. Services inflation, the Bank of England’s key gauge, fell sharply to 4.4% from 5.0% a month earlier, reinforcing the headline dip.

The data lifted gilt markets, with the 30‑year yield falling about seven basis points to a low of 5.35% and the 10‑year yield dropping roughly eight basis points to 4.8% [1]. The lower yields reflected a “good news for the gilt market” sentiment expressed by ING’s foreign‑exchange strategist Francesco Pesole [1]. The pound also steadied, edging higher against the US dollar after having slipped to 14‑month lows in the preceding days.

Policy implications and commentary

The softer inflation reading eases immediate pressure on Reeves, who has faced criticism over budget tax changes that could fuel price rises [1]. While the CPI remains above the Bank of England’s 2% target, analysts note the drop is driven by temporary factors—airfare and accommodation price swings—that are likely to reverse in January [1]. Pantheon’s Rob Wood projects CPI to climb to a peak of 3.2% by April as energy costs rise [1].

Nonetheless, some economists see the sharper fall in services inflation as a signal that the Bank may feel confident to continue its easing cycle in February [1]. Deutsche Bank’s Sanjay Raja suggests the central bank could be “emboldened to continue its easing cycle” at its next meeting [1]. The market’s reaction—lower gilt yields and a steadier pound—indicates investors are recalibrating risk premia in light of the data, though yields remain at multi‑decade highs [1].

What to watch

• February BoE meeting – policymakers will assess whether the temporary dip in services inflation justifies further rate cuts.
• January CPI release – expected to show a rebound in airfare and accommodation prices, testing the durability of the December slowdown.
• Energy price trends – higher energy bills could push CPI toward the 3.2% peak forecasted for April.

The December inflation dip offers a short‑term cushion for Reeves and markets, but the underlying trajectory remains uncertain, with upcoming data likely to determine whether the relief is fleeting or the start of a broader easing in UK price pressures.