The FTSE 100 (^FTSE) and European stocks were higher on Wednesday as traders digested news that UK inflation unexpectedly fell to 2.5% in December.
This was down from 2.6% in November, according to the Office for National Statistics. Economists had expected inflation to stay steady at 2.6%.
Core inflation fell to 3.2% from 3.5%, also a bigger-than-expected drop. City analysts had expected the rate to edge lower to 3.4%.
It comes welcome news for the Bank of England, whose target is to keep inflation at 2% over the next two years.
Grant Fitzner, ONS economist, said: “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.”
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London’s benchmark index was 0.6% higher in early trade.
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Germany’s DAX (^GDAXI) rose 0.4% and the CAC (^FCHI) in Paris was treading water.
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The pan-European STOXX 600 (^STOXX) was up 0.3%.
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Wall Street is set for a positive start as S&P 500 futures (ES=F), Dow futures (YM=F) and Nasdaq futures (NQ=F) were all in the green.
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The pound was 0.05% down against the US dollar (GBPUSD=X) at 1.2210.
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FTSE Index – Delayed Quote • USD
8,256.47 – (+0.67%)
As of 9:54:37 GMT. Market open.
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UK inflation dip opens doors for interest rate cuts
Today’s inflation figures potentially open the door to interest rate cuts by the Bank of England (BoE) next month.
Financial markets now assign a 74% probability to an interest rate cut at the Bank’s February meeting, up from 62% before the figures were published. The chances briefly surged to 81% as traders digested the news.
Ruth Gregory, deputy chief UK economist at Capital Economics, said:
Meanwhile, Michael Saunders, a former Bank of England policymaker said the inflation figures may pave the way for “slightly more interest rate cuts”.
He told BBC Radio 4’s Today programme:
Read more from Yahoo Finance UK
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Inflation figures ease pressure on Reeves
On the back of the ONS inflation data, chancellor Rachel Reeves said this morning:
The latest inflation figures come amid mounting pressure on the UK’s public finances.
Government borrowing costs reached their highest levels in years, while the pound has also slumped against the dollar, sparking criticism of Reeves’ handling of the economy and her recent tax increases outlined in the budget.
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Where did prices rise and fall?
Easing price rises in restaurants and falling hotel prices last month helped the overall inflation rate come down, as did a slowing in tobacco, clothing, and footwear inflation.
ONS chief economist Grant Fitzner said:
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Prices at hotels fell by 1.9% between November and December, contributing to the overall decline.
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Meanwhile, the cost of dining out at restaurants and cafes rose at a slower pace than in the same period a year ago, further helping to ease inflationary pressure.
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The cost of alcohol and tobacco rose at an annual rate of 5.3% in December, down from 6.8% in November. This decline can be attributed to the increase in tobacco duty introduced in November 2023.
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Despite the drop in tobacco costs, prices for alcoholic beverages such as wine rose by less than they did the year before, contributing to the slower overall inflation rate.
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Food prices, a major component of the inflation basket, continued to rise but at the same pace as the previous month, increasing by 2% in the year to December.
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The cost of bread, cereals, and beverages like mineral water, soft drinks, and juices rose at a lower rate or remained unchanged compared to the same period a year earlier.
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Air fares rose by 16.2% between November and December, down from the monthly rise of 57.1% a year earlier.
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UK inflation unexpectedly falls to 2.5% in December
UK inflation unexpectedly fell to 2.5% in December, down from 2.6% in November, according to the Office for National Statistics.
It means prices are still rising but at a slower pace than before.
Meanwhile, core inflation fell to 3.2% from 3.5%, another bigger drop expected as City analysts had expected the rate to edge lower to 3.4%.
It comes as welcome news for the Bank of England, whose target is to keep inflation at 2% over the next two years.
Financial markets now assign a 74% probability to an interest rate cut at the Bank’s February meeting, up from 62% before the figures were published. The chances briefly surged to 81% as traders digested the news.
Read more from Yahoo Finance UK
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Asia and US overnight
Global markets treaded water ahead of US consumer inflation data that could potentially shift monetary policy outlook in the US and around the world.
In Asia, the Nikkei (^N225) swung between losses and gains, ending 0.1% down on the day in Japan, while the Hang Seng (^HSI) rose 0.3% in Hong Kong. The Shanghai Composite (000001.SS) was 0.4% lower by the end of the session.
The big movers were the Japanese yen and yields. The dollar fell 0.4% to 157.3 yen as markets now see a 70% chance that the Bank of Japan will raise interest rates in January after its governor Kazuo Ueda said policymakers would discuss such an option next week.
10-year Japanese government bond yields hit 1.255%, the highest since 2011.
US stocks oscillated in a volatile day on Tuesday. Stocks rose initially after official figures showed a smaller than expected increase in producer prices in December, but this failed to materially change expectations for interest rate cuts.
The S&P 500 (^GSPC) rose by 0.1% while the Nasdaq Composite (^IXIC) fell by 0.2% and the Dow Jones Industrial Average (^DJI) rose 0.5%.
The dollar weakened against the euro on Tuesday but stayed near its highest level in more than two years following cooler-than-expected inflation data.
Osaka – Delayed Quote • USD
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At close: 15:45:02 GMT+9
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Coming up
Good morning, and welcome back to our markets live blog. As usual we will be taking a deep dive into what’s moving markets, and all that’s happening across the global economy.
Here’s a quick look at what’s on the agenda for today:
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7am: Trading updates: Currys, Hays, Diploma, Fuller Smith & Turner, Vistry Group
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7am: UK Consumer Price Index
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9am: International Energy Agency releases monthly oil report
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9am: Germany 2024 GDP
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12pm: US MBA Mortgage Applications
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1.30pm: US inflation for December
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3.30pm: US Crude Oil Inventories
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