Borrowing costs fell back to last week’s levels early on Wednesday and the pound rose slightly to stand at $1.22 as traders reacted to the unexpected inflation drop.
Easing price rises in restaurants and falling hotel prices last month helped the overall inflation rate come down, as well as prices for cigarettes, tobacco pouches, vape refills and clothing increasing at a slower pace than in December 2023.
But Grant Fitzner, chief economist of the ONS, said this was offset by the rising cost of fuel and second-hand cars.
Inflation is much lower than its peak in October 2022 when prices soared, pushing up the cost of living for households and leading to higher interest rates, which has made the cost of loans, credit cards and mortgages, more expensive.
Falling inflation does not mean prices are decreasing, but are now rising at a slower pace.
Economists had expected inflation to remain unchanged last month, so the falling rate will be welcome news for Reeves, who has hit back at critics and pledged to go “further and faster” to improve the UK’s stagnant economic growth.
She said there was “still work to be done to help families across the country with the cost of living”, but added the government had “taken action to protect working people’s payslips from higher taxes” and increased the minimum wage.
“We were clear that growth is our number one priority to put more money in the pockets of working people,” she said.
Shadow chancellor Mel Stride said economic growth had been “killed stone dead by this government” and called for Reeves to “urgently explain how she will now achieve this”.
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