The marginal fall in the headline rate of inflation in the UK may seem insignificant, but it signals some much-needed relief for the country’s Chancellor Rachel Reeves. A drop of 0.1% in December 2024 took the inflation rate to 2.5%, almost at par with expectations, mainly due to lower hotel prices and a small increase in airfares. However, what goes beyond the mere numbers is the “real positive news.” The core inflation rate, which reflects price pressures, has registered a four-year low of 3.2%, dropping from 3.5% in December. Services inflation also fell from 5% to 4.4% over two years, indicating muted inflationary pressures in the supply chain.
This is good news for the Bank of England, which had been keeping a keen eye on inflation to decide on interest rate cuts. It’s unclear how the Bank will react, but analysts predict that this drop has “cleared away objections to an interest rate cut next month.” Speculations are rife that the Bank may implement further rate cuts after February 2025.
However, the UK economy faces some major uncertainties. The incoming President, Donald Trump’s threats to impose tariffs, and the UK’s National Insurance Contributions (NICs) increase and rising minimum wage scheduled for April 2025, could have a considerable impact. Some expect companies to raise prices to compensate, while others predict that they may offer lower than expected annual wage increases. It’s the same with Trump’s tariffs – they will undoubtedly be inflationary for the US and may affect US interest rates. Some experts think that if cheaper tariffed imports find a way into the UK, it could help rein in UK inflation. The overall impact of these factors remains uncertain.
The marginal fall in UK inflation is a welcome relief for now and could help tone down the frothy hysteria seen in the past few weeks. Nonetheless, the UK government still needs to work on its growth plans, fast-tracking infrastructure, industrial, and trade strategies, and make cuts to its spending plans. Market borrowing rates are still high, and Donald Trump’s unconventional trade policies continue to cast a shadow over inflationary prospects. Though UK inflation is in the middle of the G7 pack, the outcome of these uncertainties remains unpredictable, and the seas will remain choppy for the country’s economy
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