British Inflation Eases, Fueling Rate Cut Speculations

British inflation slowed to 2.5% in December, unexpectedly lower than forecasts, leading to increased investor confidence in potential Bank of England rate cuts. Despite the dip, energy prices and wage growth might drive inflation above 3% by early 2025. The decrease reassures financial markets while presenting challenges for fiscal planning.

British inflation took an unexpected dip last month as core measures of price growth, closely watched by the Bank of England, fell more sharply than predicted. Official data indicating this decline will likely be welcomed by Finance Minister Rachel Reeves, offering some respite after a market selloff.

Inflation dropped to an annual rate of 2.5% in December, down from 2.6% in November, despite economists expecting stability. However, inflation is projected to rise again, driven by higher energy prices and wage increases, possibly exceeding 3% by early 2025, according to analysts.

Investors have increased bets on the BoE cutting interest rates, now with an 84% chance of a quarter-point reduction by February. Consequently, British bond yields have decreased and sterling briefly fell before stabilizing. Meanwhile, slower rate cuts could affect Reeves' budget target, potentially requiring public spending cuts.

(With inputs from agencies.)