LONDON: Britain's annual inflation rate unexpectedly fell to 2.5 percent last month, official data on Wednesday showed, easing some pressure on the Labour government faced with economic unrest. Analysts had forecast no change in the Consumer Prices Index (CPI) from the 2.6 percent figure in November.

The latest reading from the Office for National Statistics (ONS) comes one day after finance minister Rachel Reeves was forced to defend the government's handling of the economy following a recent spike in state borrowing costs and a hefty drop in the pound. Reacting to the data, Reeves said "there is still work to be done to help families across the country with the cost of living".

"I will fight every day to deliver that growth and improve living standards in every part of the UK," she added. Britons remain hampered by high interest rates and elevated energy bills despite the annual inflation rate retreating from a four-decade peak of above 11 percent in October 2022.

Last month, "inflation eased very slightly as hotel prices dipped" after rising in December 2023, noted chief ONS economist Grant Fitzner. "The cost of tobacco was another downward driver, as prices increased" less than a year earlier, he added. "This was partly offset by the cost of fuel and also second-hand cars, which saw their first annual growth since July 2023," Fitzner said.

Wednesday's data also showed that on a monthly basis, CPI rose 0.3 percent in December, down from 0.4 percent a year earlier. The ONS added that core CPI -- excluding energy, food, alcohol and tobacco -- increased by 3.2 percent in the 12 months to December, down from 3.5 percent in November.

Markets react

London's benchmark FTSE 100 index was up 0.7 percent following the data and the British pound eased versus the dollar and euro after initially rising, as analysts said that the update increased the chances of the Bank of England (BoE) cutting interest rates next month.

Despite falling, Britain's annual inflation rate remains above the BoE's 2.0-percent target rate, slowing the pace of its interest-rate cuts. The central bank reduced borrowing costs in August for the first time since early 2020, from a 16-year high of 5.25 percent as UK inflation returned to normal levels. It cut those further in November, taking the rate down to 4.75 percent.

"Whilst at 2.5 percent, inflation is still stubbornly above the Bank of England's target, the fact headline CPI has... fallen a bit is cause for a degree of celebration," noted Danni Hewson, head of financial analysis at trading group AJ Bell.

"Markets have immediately seized on the numbers," she added, as yields on UK government bonds also cooled slightly. Reeves on Tuesday told parliament that the government needed to "go further and faster" in its bid to kickstart economic growth in the face of UK markets turmoil.

PM support

Prime Minister Keir Starmer reiterated his full backing for Reeves. On Wednesday, he told parliament that she would remain chancellor "for many, many years to come". UK 10-year bond yields -- a key indicator of market confidence -- last week reached the highest level since the 2008 global financial crisis.

That puts fiscal pressure on the government and could force it to cut spending and further hike taxes. Reeves's maiden budget in October included tax rises for businesses -- a decision blamed for Britain struggling to grow its economy in recent months.

"The inflation reading will relieve pressure on... Reeves, who has been criticized for tax changes in the budget which could lead to price rises ahead and hold back growth this year," said Susannah Streeter, head of money and markets at Hargreaves Lansdown. – AFP