For the first time in three months, UK inflation unexpectedly fell in December, driven by a decrease in hotel prices and a reduction in tobacco costs. According to the Office for National Statistics (ONS), prices increased by 2.5% year-on-year in December, down from 2.6% in the previous month.

Key Findings:

• Annualised inflation came in at 2.5% in December, down from the 2.6% reported in November.

• Annualised inflation was forecast to come in at 2.6% (Trading Economics).

• Core Inflation came in at 3.2% in the 12 months to December 2024, down from the 3.5% in November and lower than forecast.

Nicholas Hyett, Investment Manager, Wealth Club said: "UK inflation came in lower than expected in December, with price increases slowing across broad swathes of the economy including the hospitality sector, clothing and alcohol & tobacco. The slowdown will be very welcome for the government. It increases the scope for the Bank of England to cut interest rates, boosting growth and lowering the cost of borrowing. That would create a little more financial headroom for the Chancellor and reduce the need for substantial cuts to public spending."

"However, we think there's a significant risk that inflation kicks off again later in the year. Employers are set to start paying higher rates of National Insurance in April, pushing up labour costs. That is likely to see prices rise in sectors like hospitality and retail that employ substantial numbers of people and wear margins are already pretty thin. That risks sparking an inflationary spiral. It could be a tense few months as we wait and see how things play out."

Commenting on the unexpected fall in UK inflation bringing mixed reactions, Douglas Grant, Group CEO of Manx Financial Group, said: “The news of UK inflation unexpectedly falling brings mixed reactions, offering some reassurance to businesses and consumers but causing frustration for others. Persistently high inflation above the 2% target continues to drive up costs across the board, from raw materials to energy, while significantly shaping customer spending patterns. To remain resilient, SMEs must proactively address these challenges."

"Effective pricing strategies and vigilant cash flow management are critical. Regularly reviewing budgets, renegotiating supplier contracts, and leveraging bulk purchase discounts can help offset rising costs. Additionally, adopting new technologies and streamlining operations can reduce waste, enhance productivity, and improve overall efficiency."

"SMEs should seize this opportunity to reassess their lending strategies and strengthen their financial footing to navigate ongoing market uncertainty and position themselves for long-term success."

“Data from Manx Financial Group reveals an improvement, with nearly a third of UK SMEs scaling back or pausing operations due to financial constraints, down from 40% in 2023. However, around 10% of SMEs continue to face challenges in accessing external financing. Given their pivotal role in fostering growth, employment, and innovation, creating a stable and supportive lending environment is vital. Strengthening the lending environment will help businesses navigate rising taxes, geopolitical risks, and cost-of-living pressures."

“The Labour government must implement targeted solutions to improve credit availability, address inflationary pressures, and foster collaboration between traditional and alternative lenders."

"To build resilience, SMEs should capitalise on opportunities for monetary easing and secure affordable credit to grow and innovate. Supporting this dynamic will be crucial to sustaining recovery and ensuring SMEs remain at the heart of the UK economy.”

Paul Noble, CEO of Chetwood Bank, said: “Some good news to start the year for Britons. Many will have approached today’s result with some apprehension, but 2025 can begin on a positive note despite the uncertainty.”

“The economic environment is still nowhere near stable, with inflation yo-yoing back and forth from the 2% target. The uncertainty surrounding the budget has not dissipated, but these figures will help to calm nerves nationwide, at least in the short term. However, the spectre of public sector wage increases will keep experts guessing as the year goes on, and the Bank of England will be watching CPI closely as they consider the timing of their next rate change.

“The one thing that consumers can control is their financial future, and it’s more important than ever to be proactive in seeking out the best savings opportunities. Financial institutions must support them by providing accessible solutions and products that add real value.”