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When news broke that the inflation rate had fallen last month, it came as a surprise.
Most economists thought price increases would remain at 2.6 percent annually in December, the same figure recorded in November.
Instead, it hit 2.5 per cent, helped by a fall in hotel prices and a slower pace of price rises in restaurants, according to the Office for National Statistics (ONS), making it the final figure for 2024.
Softer inflation has raised hopes that the Bank of England could cut interest rates, saving borrowers large sums on loans and mortgages. The central bank's rate-setting committee will make a decision within three weeks.
Danni Hewson, head of financial analysis at AJ Bell, said the chances of a rate cut at the next meeting have increased from 60 percent to more than 80 percent, citing data from data firm Refinitiv.
“There is growing optimism that there could be more cuts by 2025 than anticipated,” he said. “A significant cooling in service sector inflation will have increased the odds, as central bankers have been rightly concerned about the impact of wage rises on this crucial cog in the UK's economic wheel.”
But don't get too excited just yet, he added, as cost pressures are likely to emerge again later this year.
“It is important not to overdo it and not to forget the possibility of another rise in inflation if companies pass on those additional costs that will hit them in April, as they have warned they will have to do.”
Additional costs facing businesses include higher National Insurance payments imposed on them by Chancellor Rachel Reeves, as well as the increase in the minimum wage in April.
This could lead to a rise in inflation later this year, although it will then fade again. Oil prices have also risen: Brent crude is up 8.7 percent in the past month, suggesting gasoline and diesel prices could be rising.
Not everyone is convinced that rate cuts and cheaper mortgages will come in February. Mark Ashbridge, managing director of financial and mortgage advisers Ashbridge Partners, said today's inflation data is unlikely to change previous predictions that two rate cuts of 0.25 percentage points each are likely to happen this year. one, as many economists predicted, but it is not yet time. in doubt.
“For variable rate borrowers, you will be eager to understand if this means a quarter-point decline in February, or could it be postponed until May when there is more data?
“The Bank of England's Monetary Policy Committee is likely to buy time, so May is more likely.
New data will be published tomorrow: the economic growth figures for November. These statistics are less preferred by economists than the quarterly figures, which cover three months, but they will still be watched closely to see how well the economy is performing and whether it needs a boost from cheaper borrowing.
All of these statistics are intertwined, making predictions difficult.
Economists believe that lower interest rates will help boost growth, as companies can spend less money on interest payments and more on investment and hiring, and inflation erodes savings, which will also be affected if interest rates interest goes down.
Borrowers can eventually count on lower rates, but the answer to “when” changes frequently.
