Wed, 15 Jan 2025

Why a small drop in inflation matters to you

The marginal dip in UK inflation is unusually important and offers some respite to the chancellor.
A slight drop in UK inflation from 2.6% to 2.5% may seem insignificant, but it's actually a positive sign for the economy. The Bank of England watches the underlying numbers closely, and these show that core inflation has dropped to 3.2%, its lowest level in four years. Services inflation is also at a two-year low, falling from 5% to 4.4%. This suggests that price pressures are easing. The decrease in inflation is largely due to lower hotel prices and reduced airfare increases. However, the market is now focused on underlying numbers, which indicate muted inflationary pressures. While it's uncertain how companies will react to upcoming changes such as increased National Insurance Contributions (NICs) and a rise in the minimum wage, some analysts believe that these measures may not have the expected impact. The UK government still faces challenges, including convincing investors of its growth plans and meeting self-imposed borrowing rules. Market borrowing rates remain high, and the shadow cast by Donald Trump's trade policies looms large. However, for now, headline and underlying inflation numbers point in the right direction, offering a welcome respite for Chancellor Rachel Reeves. Investors are now betting on an interest rate cut next month from the Bank of England, and markets have shifted their forecasts to anticipate further cuts later this year. Despite these positive signs, economic uncertainty remains, with energy price increases predicted for April and job prospects for younger workers likely to be affected by Budget measures.
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