December 2024 saw UK inflation unexpectedly dips to 2.5% - what does this mean?

UK inflation unexpectedly dipped in December for the first time in three months as hotel prices fell and tobacco costs eased.

Prices rose 2.5% in the year to December, down from 2.6% the month before, the Office for National Statistics (ONS) said.

Despite the rate of price rises remaining above the Bank of England's target, expectations of an interest rates cut next month have grown.

Government borrowing costs dropped from their recent highs, as traders reacted to the unexpected inflation fall.

The chief economist of the ONS said while hotel prices had fallen last month, the price decreases were offset by the cost of fuel and second-hand cars rising.

Falling inflation does not mean prices are decreasing, but are now rising at a slower pace.

But economists had expected inflation to remain unchanged last month, so the falling rate will be a small relief for the Chancellor, who hit back at critics and pledged to go "further and faster" to improve the UK's stagnant economic growth - the government's main priority.

Michael Saunders, a former member of the Bank of England's Monetary Policy Committee which sets interest rates, said the latest inflation figure would be "some help" in trying to ease some of the worries over UK interest rates. But he went on to say "if it stays like this, we will be on route to slightly more interest rate cuts."

Last month the Bank of England decided to hold interest rates at 4.75% after policymakers said the UK economy had performed worse than expected, with no growth at all between October and December.

The Monetary Policy Committee is due to meet next in February, but inflation remains over the Bank's 2% target.

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