The new inflation rate figure has been confirmed at 2.5% in a surprise drop. It had been expected to remain the same as the previous figure of 2.6% or even increase to 2.7%. This is good news as, although it’s still higher than the target rate of 2%, it has slowed down for the first time in 3 months.
Why has the new inflation rate figure dropped?
The main reasons for the drop to 2.5% in the year to December are hotel prices and tobacco costs. For hotels, the annual inflation rate fell to 3.4% in December from 4% in November. A year ago, hotel prices increased and this latest annual rate is the lowest since July 2021.
Tobacco costs also abated, increasing at a slower rate than a year ago. The easing of restaurant prices and smaller increases in airfares have also contributed to lowering the inflation rate. In contrast, the costs of fuel and second-hand cars increased, which offset the rate.
Core inflation, which excludes food, energy, alcohol and tobacco, fell to 3.2% in December from 3.5% in November. This was better than expected as experts had anticipated the rate to remain higher at 3.5%. Services inflation also dropped, falling to 4.4% from 5%, which was also better than the anticipated 4.9%.
Will interest rates be cut following this latest inflation rate figure?
The Bank of England’s base rate was held at 4.75% in December after inflation rose from 2.3% to 2.6% in the year to November. The next review of the base rate by the Monetary Policy Committee (MPC) is in February. Although inflation is still above the BoE’s 2% target, the latest inflation figure shows that it is slowing again. As it was lower than expected, this is a positive sign that the MPC may vote to cut the base rate by an anticipated 0.25%.
The latest house price inflation figures
House prices have also increased in the UK, with the latest inflation figure showing an increase of 3.3% in November. This is an increase from October’s house price inflation figure of 3%. In England and Wales, house prices have increased by an average of 3% while they have increased by a higher average of 4.7% in Scotland.
Demand is currently high and one reason may be that buyers are trying to get ahead of the upcoming stamp duty changes. On 1st April, the rate thresholds will change and house buyers will be faced with considerably higher tax bills. For example, no stamp duty is currently payable when buying a residential property up to a value of £250,000. From 1st April, however, this nil-rate threshold will be reduced to £125,000 and a rate of 2% will be applied for the portion between £125,001 and £250,000.
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