CPI inflation in the UK fell unexpectedly in December, reaching 2.5% and surprising financial market analysts. The figure could give the Bank of England (BoE) some space to cut interest rates in its February meeting. The British pound fell just after the report's release but regained ground quickly against the US dollar.

Economists will focus today on the US CPI inflation report for the month of December which is expected to show a small rise. In news from the eurozone, François Villeroy de Galhau, member of the governing council of the European Central Bank (ECB), said that the battle against inflation has been practically won and sees the benchmark interest rate dropping to 2% by summer.
 

UK CPI Inflation Drops In December

A report by the Office for National Statistics (ONS) revealed that UK CPI inflation fell to 2.5% on a yearly basis in December. The figure was lower than anticipated by economists. Core inflation also fell, coming in at 3.2% on an annualised basis, down from 3.5% in November.

Service inflation dropped to 4.4% from 5% recorded in November. The Bank of England’s Monetary Policy Committee (MPC) will convene on February 6th to decide on matters of monetary policy with December’s inflation figure potentially giving some space for borrowing costs’ reductions. The BoE’s inflation target is 2%.

Economists at PwC noted that “with UK growth momentum slowing further at the end of the year, the news that services inflation has finally cooled will be welcomed. UK bonds suffered in the recent market sell off, so any indication that inflation was continuing to run hot would have put pressure on the government to take action. Some pressures remain, particularly in light of the autumn budget, but this may be the green light the monetary policy committee needs to resume the rate cutting cycle.”
 

ECB Policymakers Suggest Future Rate Cuts

European Central Bank (ECB) vice president, Luis de Guindos, said that the central bank would not pre-commit to a particular rate path and added that if incoming data would confirm its baseline further rate cuts could be expected.

De Guindos stressed that a high level of uncertainty calls for prudence in terms of rate-setting. The Spanish banker mentioned that the focus has shifted from high inflation levels to concerns about low economic growth.

Oli Rehn, Finland's central bank head, said earlier in the week that the euro bloc’s central bank plans to continue reducing interest rates and expects to exit restrictive monetary policy likely by midsummer. Rehn suggested that, although potential US tariffs could disrupt the economic outlook, businesses tend to find ways to circumvent such limitations.
 

UK And US Retail Sales December Reports

On Thursday, the US Census Bureau will release the December Retail Sales report that is expected to show a small drop to 0.6% on a month-to-month basis from 0.7% recorded in November. A note from the Bank of America (BoA) said that “as we kick off 2025, the consumer continues to benefit from a supportive labour market with after-tax wage and salary growth up 3% YoY in December.”

On Friday, it will be the UK’s turn with the ONS publishing the country’s retail sales report for the last month of 2024. Economists expect retail sales to come in at 0.4% on a monthly basis and 4.2% on an annualised basis. A report by the British Retail Consortium (BRC) suggested that “following a challenging year marked by weak consumer confidence and difficult economic conditions, the crucial ‘golden quarter’ failed to give 2024 the send-off retailers were hoping for."

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