Unexpectedly, UK inflation decreases to 2.5%, and the core price growth rate slows down even more.

• Recently, the U.K. economy has been facing challenges, as economists have expressed worries about the country's slow growth prospects.
• The country is facing challenges due to both external factors, such as potential trade tariffs, and internal fiscal and economic issues.

Inflation in the U.K. decreased to 2.5% in December, lower than anticipated, and core price growth slowed down, as per data from the Office for National Statistics.

In November, the consumer price index (CPI) increased to 2.6%, while economists surveyed by Reuters predicted that the December reading would remain the same.

The twelve-month core inflation rate, excluding food and energy prices, was 3.2% in December, a decrease from the previous month's rate of 3.5%.

In December, the annual services inflation rate in the U.K. decreased from 5% in November to 4.4%, while the monthly prices increased due to higher fuel costs and faster rising fees for services, resulting in a more than three-year low of 1.7% in September.

The pound was down 0.3% against the dollar at 7:15 a.m. London time, shortly after the release.

Despite inflationary pressures, such as resilient wage growth and uncertainty over Britain's economic outlook, the Bank of England is expected to cut the key interest rate from 4.75% to 4.5% at its next meeting on Feb.6. The central bank's inflation target is 2%.

Recently, the U.K. economy has faced challenges, including slow growth prospects and concerns about external factors such as potential trade tariffs from President-elect Trump, as well as internal fiscal and economic challenges that have affected the Labour government and Treasury since the October budget.

The U.K.'s priority is economic growth, according to British Chancellor Rachel Reeves, who stated on Wednesday that there is still work to be done to assist families with the cost of living.

Capital Economics' Deputy Chief UK Economist Ruth Gregory stated that the data will be "welcome news" for Rachel Reeves, as underlying price pressures are "a bit more favorable than we had thought."

The BOE's reading of the economy strengthened the case for a 25-basis-point interest rate cut in February, according to her emailed comments, which also lends support to our view that rates will fall further and faster than markets expect.

In January, our forecast predicts that CPI inflation will increase to almost 3.0%, higher than most anticipate in the first half of this year. However, we expect it to fall below the 2% target next year as the persistence of inflation decreases.

Fiscal challenges

The tax rises announced by the government last fall, set to take effect in April, have caused concern among British businesses who predict that investment, hiring, and growth will be negatively impacted.

The U.K.'s borrowing costs and currency weakened amid economic jitters, posing a dilemma for Finance Minister Rachel Reeves's budget-balancing ambitions.

Reeves has pledged to adhere to her own financial guidelines to ensure that all daily expenses are covered by revenue and that government debt is decreasing. Now, she may have to choose whether to adjust or disregard these constraints.

Reeves stated that the fiscal rules outlined in the budget are non-negotiable, emphasizing that economic stability is crucial for economic growth and prosperity.

Ben Zaranko, an associate director at the Institute for Fiscal Studies, stated that Reeves is confronted with a challenging set of choices.

The difficult fiscal inheritance and global economic factors have led to this unfortunate predicament, he stated in his comment.

Zaranko stated that the government's choices and promises are incompatible: to adhere to a strict fiscal rule while maintaining a small margin; to prioritize public services and avoid another round of austerity; not to impose the largest taxes and not to raise taxes again after the Autumn Budget; and to hold only one fiscal event per year. If higher interest rates wipe out the "headroom," something will have to be adjusted.