In a surprising turn of events, annual inflation in Britain eased in December 2024, largely attributed to the slow growth in service prices, which experienced its most significant decline since March 2022. This shift contradicted market expectations that anticipated inflation levels would remain stable, reflecting an evolving economic landscape in the UK. According to data released on Wednesday by the Office for National Statistics, the consumer prices index recorded a 2.5% increase for the year ending December 2024.
This figure marks a decrease from the previous month’s reading of 2.6% and falls short of analysts' consensus estimates, indicating a potential shift in consumer behavior and economic conditions. Delving deeper into the composition of inflation, goods inflation saw a notable increase, rising from 0.4% to 0.7%.
However, the real story lies within the service sector, where inflation dropped to a remarkable 4.4% from 5% in November 2024. Specifically, the hospitality industry registered a decrease in inflation rates, with restaurants and hotels seeing the lowest annual rate since July 2021; their inflation declined to 3.4% from a previous 4%. Further analysis of the hotel market revealed that hotel prices fell by 1.9% month-over-month, contrasting with a rise of 3.1% recorded during the same period last year.
This downswing provides insight into shifting consumer demand and potential repercussions for businesses reliant on domestic tourism. On the transportation front, the overall decline in prices softened, primarily driven by the rising costs of motor fuels and secondhand vehicles. However, these gains were counterbalanced by a downturn in airfare prices, leading to an overall annual price decrease of 0.6% for the year ending December 2024, compared to a more substantial decline of 1.1% reported in November 2024. Looking at core inflation—which excludes volatile sectors such as energy, food, alcohol, and tobacco—the UK's annual core inflation rate stood at 3.2%, a decline from the previous 3.5% and below the market forecast of 3.4%.
This moderation in core inflation is crucial for policymakers as it reflects the underlying trends affecting consumer prices beyond temporary fluctuations. An analyst from Berenberg commented on the implications of these figures, stating that the recent CPI inflation drop aligns with the Bank of England's November projections.
This alignment may influence the central bank's decisions regarding interest rate adjustments in upcoming meetings, particularly the anticipated meeting scheduled for February 6. Despite the positive headlines, challenges remain as labor costs are expected to rise, with pay growth hovering around 5%.
Analysts caution against expecting a straightforward relationship between falling inflation and interest rate cuts, highlighting factors such as the depreciation of the pound and rising oil and natural gas prices that may necessitate a pause in any further rate reductions after previously planned cuts in February and May. In summary, while the December CPI report brought positive news for consumers, the outlook for inflation remains complex, and economic stakeholders must remain vigilant about potential headwinds ahead as the fiscal year progresses..