British inflation experienced an unexpected slowdown last month, with key core price indicators—closely monitored by the Bank of England (BoE)—falling more than anticipated, according to

official data. The news is likely to be welcomed by Finance Minister Rachel Reeves, following recent market turbulence.

The Office for National Statistics (ONS) reported that the annual inflation rate decreased to 2.5% in December, down from 2.6% in November. This was slightly below the 2.6% forecast by economists polled by Reuters.

In November, the BoE had projected that inflation would reach 2.5% by December, aligning with the actual outcome. The central bank is set to announce its next interest rate decision on February 6.

Following the release of the inflation data, the British pound weakened.

"Policymakers and Treasury officials will likely breathe a modest sigh of relief," remarked Scott Gardner, investment strategist at Nutmeg, a digital wealth management firm owned by J.P. Morgan.

Recent days have seen significant selling pressure on British government bonds, driven partly by concerns that persistently high inflation could limit the BoE’s ability to reduce interest rates this year, potentially hampering economic growth and further straining public finances.

Core inflation, which excludes volatile items such as energy, food, alcohol, and tobacco, declined to 3.2% in December from 3.5% in November. This drop was steeper than the 3.4% expected by Reuters-polled economists.

Services inflation—a key indicator for the BoE—fell to 4.4% in December, the lowest level since March 2022, compared to 5.0% in November. Analysts had predicted a smaller decline to 4.9%.

The BoE pays close attention to both core and services inflation, as they provide a clearer picture of underlying price pressures in the economy, particularly those driven by persistent wage growth.