British inflation fell unexpectedly last month, official figures showed, offering Chancellor Rachel Reeves “timely reprieve” amid concerns about financial market turmoil.
Treasury costs fell on Wednesday morning as traders reacted to the latest economic data.
The consumer price index inflation rate fell to 2.5% in December from 2.6% in November, the Office for National Statistics said.
Most analysts had expected inflation to remain unchanged at 2.6% last month.
December’s headline figure nevertheless remains above the Bank of England’s 2% target level, raising concerns among economists and policymakers amid stagnant economic growth.
Fears of so-called stagflation – where inflation is high but economic growth is low – have contributed to a period of volatility in financial markets over the past week.
This has caused the value of the pound to fall sharply and the cost of borrowing to rise to multi-decade highs, signaling weaker confidence in the economy.
But yields on government bonds, also known as government bonds, fell shortly after markets opened Wednesday morning.
The yield on 30-year government bonds fell by about five basis points to 5.4%, and the yield on 10-year government bonds also fell by about five basis points to 4.84%.
Chancellor Ms Reeves responded to the latest inflation figures by saying she will “fight every day” to improve people’s living standards.
“There is still work to be done to help families across the country with the cost of living,” she said.
“I will fight every day to deliver that growth and improve living standards in every part of Britain.”
Former Bank of England policymaker Michael Saunders said Downing Street will breathe a “sigh of relief” after the surprise dip in inflation in December.
He added that it will be “some help” in alleviating some of the “concerns about the prospects for Britain”.
Suren Thiru, economic director of the Institute of Chartered Accountants in England and Wales (ICAEW), said the surprise drop “provides some timely calm amid the turmoil in financial markets”.
But he added that “any relief could be short-lived” as inflationary pressures increase this year.
“Despite the unexpected fall in December, the near-term outlook for UK inflation remains ominous, with higher energy bills likely to push headline rates above 3% in coming months, helped by the expected April rise in Ofgem’s energy price cap,” it said he.
Sanjay Raja, Deutsche Bank’s chief U.K. economist, said Wednesday’s inflation report will come as “welcome relief to the Treasury and the Bank of England.”
“The bottom line is that the Bank of England is likely to feel emboldened to continue its easing cycle in February,” he said, meaning rates could be cut again next month.
