CPI inflation fell unexpectedly in December to 2.5% from 2.6% in November after two months of rises.

The move was unexpected and will provide some relief for Chancellor Rachel Reeves.

Lower inflation in restaurant and hotel costs were the main downward pressure on inflation with higher transport costs the main upward trend.

The Consumer Prices Index (CPI) rose by 2.5% in the 12 months to December 2024, down from 2.6% in the 12 months to November.

The Consumer Prices Index including owner occupiers' housing costs (CPIH) was up by 3.5% in the 12 months to December 2024, unchanged from November.

On a monthly basis, CPI rose by 0.3% in December 2024, down from 0.4% in December 2023.

Core CPIH (excluding energy, food, alcohol, and tobacco) rose by 4.2% in the 12 months to December 2024, down from 4.4% in November and the CPIH goods annual rate rose from 0.4% to 0.7%.

There was better news on services inflation compared to recent months with the CPIH services annual rate down from 5.7% to 5.4%.

The previous month CPI inflation spiked upwards for the second month in a row, to 2.6% in November, ONS reported.

Lindsay James, investment strategist at Quilter Investors, said: “CPI data for December shows a modest easing in price pressure, with headline inflation falling to 2.5% from 2.6% the previous month. This rounds off a year marked by a resurgence of inflationary forces in its latter stages, prompting the Bank of England to diverge from the ECB and the Federal Reserve by keeping interest rates flat at 4.75% during the December meeting.

“Services inflation, which stood at 4.4%, down from 5% in November, remains a major focus as wage inflation stays well above the 2% target. Employers’ responses to the autumn budget suggest that cuts to headcount and price hikes are the most likely outcomes. While these measures may eventually dampen wage inflation, in the near term, public sector pay rises of around 5-6%, combined with ongoing labour shortages in parts of the service economy, continue to drive elevated levels of wage growth. With wages accounting for around 60% of the costs within the service sector, this remains a significant obstacle to further interest rate cuts.

William Marsters, senior sales trader at investment firm Saxo UK said: “UK December CPI comes in weaker than forecast which should give an excuse for UK gilts to rally today after their recent lows. Consumer prices rose 2.5% yoy, versus the estimate of 2.6%. This is the first time in 3 months the metric has fallen, and will keep the door open for a BoE rate cut next month. GBP trades weaker on the announcement. These inflation figures will be a welcome relief for UK Chancellor Rachel Reeves.”

Daniel Casali, chief investment strategist at wealth manager Evelyn Partners, said: "While the December inflation data came in below economists’ expectations it remains stubbornly high and is expected by the Bank of England (BoE) to accelerate a little over the course of 2025.

"In the data, services CPI inflation remains elevated at 4.4% year-over-year, about twice the rate it was in December 2019, before the pandemic. Within services, there are still pockets of inflation, like rents in the housing category, which are running north of 7% per year. Outside of services, goods CPI inflation came in at 0.7% year-on-year and remains a drag on the overall rate of inflation.

"Looking further on, the UK inflation trajectory will be complicated by the demand boost from the Budget at the end of October after the government relaxed fiscal rules. The hike in the National Minimum Wage and Employers National Insurance (both from April) and its impact on encouraging producers to raise prices to maintain profit margins is another consideration for the BoE. Rising crude oil prices, where Brent has now moved north of $80/barrel, its highest level since last summer, is also worth monitoring as a source of inflation.

"The next opportunity for the BoE to cut interest rates is at the 6 February meeting. The future markets largely expect the BoE to lower rates by 25bps to 4.5% at this meeting.

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