LIVE MARKETS-UK CPI: Just what the doctor ordered

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UK CPI: JUST WHAT THE DOCTOR ORDERED

Inflation in Britain slowed unexpectedly in December and core measures fell more sharply, giving a welcome lift to British bonds and stocks and keeping the pound steady.

Traders added to bets for rate cuts from the Bank of England after the data, pricing in about an 85% chance of a quarter-point cut at the February meeting from about 60% on Tuesday.

Here's what the analysts say:

SANJAY RAJA, CHIEF UK ECONOMIST, DEUTSCHE BANK

"Today's inflation report will be a welcome relief for the Treasury and Bank of England.

"Bottom line, the Bank of England will likely feel emboldened to continue its easing cycle in February. And rate cut expectations further out should ease on the back of today's data."

MATT SWANNELL, CHIEF ECONOMIC ADVISOR TO THE EY ITEM CLUB

"The downward pressure from air fares should unwind in next month's data, while several other factors point to inflation rising again this year.

"Still, most of this year's upward pressures are likely to prove transitory, while the MPC has said that it is starting to put a greater weight on concerns about weak growth and employment prospects.

"While a period of above-target inflation may stop the MPC from accelerating the pace of rate cuts, the EY ITEM Club still expects to see a gradual loosening of monetary policy throughout 2025."

ANDREW WISHART, ECONOMIST, BERENBERG

"CPI inflation had been running above the Bank of England's forecast, but this drop puts it back in line with the central bank's November projection. That should clear the way for policymakers to lower interest rates at the next meeting on 6 February.

"Prior to the release the market was only pricing in a two thirds chance of a cut, so the good news should pull down market rate expectations and in turn relieve some pressure on gilts."

KALLUM PICKERING, CHIEF ECONOMIST, PEEL HUNT

"It is important to consider why the data on prices may have surprised to the downside – especially in measures of domestically-generated prices like core and services.

"UK economic activity softened materially in the second half of 2024 after a strong start to the year, and may have even stalled in the final quarter amid weakness in domestic services and retail.

"If the cause of the softer momentum in prices during December is that a sudden drop-off in demand has sapped firms' pricing power, the risk to watch now is that incoming data on the real economy surprise to the downside - we will be looking closely at the November GDP print out tomorrow."

MICHAEL METCALFE, HEAD OF MACRO STRATEGY, STATE STREET GLOBAL MARKETS

"Given the difficult start to the year for UK fixed income markets this will be welcome news, especially if growth data shows a modest rebound later in the week."

(Samuel Indyk)

FOR WEDNESDAY'S OTHER LIVE MARKETS POSTS

UK STOCKS OUTSHINE IN EUROPE AS INFLATION SLOWS CLICK HERE

EUROPE BEFORE THE BELL: FTSE FUTURES OUTPERFORM ON SOFT INFLATION DATA CLICK HERE

INFLATION DUO TAKES CENTRE STAGE CLICK HERE