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UK inflation unexpectedly slowed in December after two months of rises as hotel prices dipped and tobacco costs eased.
Prices rose by 2.5% in the year to December, down from 2.6% the month before, the Office for National Statistics (ONS) said. It means prices are still rising but at a slower pace than before.
Easing price rises in restaurants and falling hotel prices last month helped the overall inflation rate come down, as did a slowing in tobacco, clothing, and footwear inflation.
ONS chief economist Grant Fitzner said: “Inflation eased very slightly as hotel prices dipped this month, but rose a year ago. The cost of tobacco was another downward driver, as prices increased by less than this time last year.
“This was partly offset by the cost of fuel and also second-hand cars, which saw their first annual growth since July 2023.”
Economists had anticipated that inflation would remain at 2.6% for December, meaning the latest data came as a surprise, potentially opening the door to interest rate cuts by the Bank of England (BoE) next month.
Financial markets now assign a 74% probability to an interest rate cut at the Bank’s February meeting, up from 62% before the figures were published. The chances briefly surged to 81% as traders digested the news.
Prices at hotels fell by 1.9% between November and December, contributing to the overall decline. Meanwhile, the cost of dining out at restaurants and cafes rose at a slower pace than in the same period a year ago, further helping to ease inflationary pressure.
The cost of alcohol and tobacco rose at an annual rate of 5.3% in December, down from 6.8% in November. This decline can be attributed to the increase in tobacco duty introduced in November 2023. Despite the drop in tobacco costs, prices for alcoholic beverages such as wine rose by less than they did the year before, contributing to the slower overall inflation rate.
Food prices, a major component of the inflation basket, continued to rise but at the same pace as the previous month, increasing by 2% in the year to December. The cost of bread, cereals, and beverages like mineral water, soft drinks, and juices rose at a lower rate or remained unchanged compared to the same period a year earlier.
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Air fares rose by 16.2% between November and December, down from the monthly rise of 57.1% a year earlier.
Core inflation, which excludes volatile items such as food and energy, also fell more than expected, dropping to 3.2% from 3.5%. City analysts had forecast a more modest decline to 3.4%.