U.K. Inflation Rate Falls to 2.5%, Boosting Stock Market Confidence
The U.K. experienced welcome news as inflation eased to 2.5% for December 2024, down from 2.6% the previous month. This unexpected dip not only defied forecasts but also triggered enthusiasm among traders, hinting at the possibility of interest rate cuts from the Bank of England (BoE) as soon as February 2025.
The Office for National Statistics (ONS) announced the figures earlier today, which reveal the core inflation rate fell to 3.2%, down from 3.5% previously and below economists' expectations of 3.4%. Grant Fitzner, chief economist at ONS, explained, "Inflation eased very slightly as hotel prices dipped this month but rose a year ago. The cost of tobacco was another downward driver, as prices increased by less than this time last year. This was partly offset by the cost of fuel and also second-hand cars, which saw their first annual growth since July 2023."
This decline stirred a relief rally across the stock market, with London’s FTSE 100 gaining 0.7% or 56.34 points, closing at 8,257.88. Concurrently, the FTSE 250 index jumped 1.4%, reflecting increased investor confidence amid hopes for declining interest rates. Traders observed significant movement among housebuilding, property firms, and utilities, all of which benefitted from the enhanced economic outlook.
The bond market also saw positive effects, with long-term government bonds gaining traction following the inflation figures. This easing of inflation pressures was particularly welcomed following weeks of volatility and high borrowing costs. Analysts are now speculating on the City’s forecast for the Bank of England bank rate, which fell from 4.42% to 4.18%, predicting two possible cuts this year from the current rate of 4.75%.
Peel Hunt economist Kallum Pickering noted the cautious optimism surrounding the U.K. economy: "While we remain cautiously optimistic, risks remain tilted to the downside near-term." The pressure from rising as well as volatile costs has prompted economic forecasts to suggest inflation might accelerate during the first half of 2025 due to higher wage costs.
Significantly, housebuilder shares rallied as prospects for lower mortgage costs gained momentum. Companies like Persimmon and Barratt Developments witnessed stock price hikes of over 4%, reflecting the anticipated reprieve from high-interest borrowing.
The outlook for inflation remains complex, with predictions of potential spikes driven by forthcoming wage increases and other cost pressures. Deutsche Bank economist Sanjay Raja commented, "Looking ahead, price momentum will likely pick up from here. We expect increases to the National Living Wage and employer National Insurance Contributions will push inflation higher over 2025."
Meanwhile, within corporate sectors, Currys PLC announced it would raise profit guidance following strong festive performance, driving its share price up by approximately 11%. Chief executive Alex Baldock reflected optimism, stating, "We start 2025 confident our strategy is working."