Inflation in the UK unexpectedly fell in December 2023, the first drop in three months due to a slump in hotel prices and easier costs associated with tobacco. The country’s Office for National Statistics reported a rise of 2.5% during the year to last December, down from 2.6% on the previous month. Although the drop was noted, it remained higher than the Bank of England’s target rate of inflation. It is due to make its next interest rate decision in February.
Grant Fitzner, Chief Economist of the ONS, said that despite hotel costs falling last month, fuel and used car prices had risen. And whilst tobacco prices did increase by less than they did in December 2023, it was still a factor in the lower inflation rate. To clarify, falling inflation does not mean prices are decreasing; however, the pace of the increase has slowed down.
Although economists had predicted inflation would remain steady, the fall will be welcome news for Chancellor Rachel Reeves, who has been grappling with pressure from rising government borrowing costs and a slump in the pound’s value. Reeves pledged to boost economic growth and improve the financial well-being for working families by increasing the minimum wage, saying that the government had already “taken action to protect working people’s pay-slips from higher taxes”. Furthermore, Michael Saunders, a former member of the Bank of England’s monetary policy committee, suggested that the latest figures could help to ease concerns about UK interest rates.
However, the threat of inflation rising, with firms increasing prices to cover the forthcoming tax rises in April and a potential increase due to trade taxes imposed by Donald Trump, could impact the UK economy by pushing up living costs for households and making loans, credit cards and mortgages more expensive. This, in turn, could lead to rising interest rates, thereby hampering economic growth
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