Inflation falls slightly after two months of rises

The newest member of the Bank of England's interest rate-setting committee has made the case for up to four cuts this year following a surprise fall in inflation.

Professor Alan Taylor used a speech in Leeds to argue that the Bank should act "pre-emptively", suggesting he was more worried about the state of the economy than the threat posed by the pace of rising prices.

Professor Taylor, who backed a cut to Bank rate at the last meeting in December, said: "We are in the last half mile on inflation, but with the economy weakening, it's time to get interest rates back toward normal to sustain a soft landing."

He made his remarks after official data showed that inflation eased to 2.5% in December. Economists had expected the figure to remain at 2.6%, the level recorded in November.

Money latest: What inflation fall means for you

Inflation is still above the Bank of England's 2% target but is in line with the forecast it made in November.

What does it mean for interest rates?

It means there is more chance of an interest rate cut when the Bank's rate-setting Monetary Policy Committee (MPC) meets in three weeks' time.

Before the inflation announcement, markets thought there was a 62% chance of a cut but, following the release, that rose to 83%.

Professor Taylor's remarks came too late to reflect any further shift but the pound lost ground against the dollar by about a third of a cent, having recovered somewhat when US inflation figures also undershot market expectations.

Beyond the headline consumer price index (CPI) measure of inflation are more figures that will be welcome news for the Bank and for Chancellor Rachel Reeves, who has faced increasing pressure over her handling of the economy.

Inflation: Which prices are rising and falling fastest?

Two metrics closely watched by the Bank fell more than expected.

The persistently high services inflation, which is impacted by rising wages, fell from 5% a month before to 4.4%, far below the 4.9% forecast by economists.

Similarly, core inflation - which tracks price rises without energy and food which can be volatile - dropped to 3.2%, from 3.5% in November.

Inflation data takes on outsized significance in determining the likelihood of a rate cut as the ONS's labour force data, which assesses the health of the jobs market, has by its own admission been unreliable.

Why has the inflation rate come down?

Inflation was slowed by restaurants and hotels putting up their prices by less than before. Tobacco prices also rose less than the same month a year earlier.

Acting to push up inflation was the growing cost of fuel and second-hand cars.

Wednesday's data brings much-needed good news for the chancellor who has faced criticism over her handling of the economy after a week of market turmoil.

Government borrowing costs went up and the pound, which can measure investor confidence in the UK economy, was down to $1.22.

The jump in borrowing costs has threatened to knock Ms Reeves off target for meeting her budget rules.

Risk remains 'elevated'

There have also been fears that the chancellor's budget could push inflation higher due to changes to employers' national insurance contributions and other measures.

Responding to the data, Ms Reeves said: "There is still work to be done to help families across the country with the cost of living. That's why the government has taken action to protect working people's payslips from higher taxes, frozen fuel duty and boosted the national minimum wage."

The principal economist at the Confederation of British Industry, Martin Sartorius, said however that a risk of higher inflation due to the budget remains "elevated" despite December's slight fall.

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