British inflation unexpectedly slowed to 2.5% in December, while core inflation (3.2%) and services inflation (4.4%) both came well below expectations, boosting the chance of a February interest rate cut by the Bank of England.
Policymakers will welcome the big unexpected drop in services inflation, and it underlines my view that the market is underestimating the pace of the BOE’s cutting path this year. Hotels were the largest downward contributor, however, and this has been a particularly volatile component.
Someone else who will welcome today’s data is Rachel Reeves. A tick lower in gilt yields should ease the pressure on the Chancellor as it should slightly lift the squeeze on the UK’s fiscal headroom heading into the Spring Budget.
The market isn’t too sure where to take the pound it seems – normally the prospect of extra cuts and lower yields would dent its attractiveness, but right now it also means some extra headroom for the Chancellor, and a smaller chance that she has to implement some spending cuts. For now, it looks to be taking some damage.
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