Inflation dips to 2.5% – consumer credit industry reaction

Latest ONS data has shown that inflation dropped slightly to 2.5% in December, up from 2.3% in October, down from 2.6% in November.

Commenting on the inflation figures, 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.”

John Phillips, CEO of Just Mortgages and Spicerhaart, said “News of a slight drop in inflation is certainly a surprise and contradicts the expectations of the markets and many analysts. This will no doubt be welcome news for ministers – not least the Chancellor who faces considerable pressure as uncertainty rips through the UK financial markets.

“How likely the UK is able to sustain this slowing in inflation is still up for debate, especially given the fallout from the recent Budget and the implications for businesses, as well as the growing prospect of US tariffs days away from Trump’s inauguration. All have had an impact on market expectations with rising gilt yields and government borrowing costs.

“The Bank of England stands at a crossroads between managing sticky inflation and supporting economic growth. The latter cannot be understated given growing fears of stagflation. A slight reprieve or not, will a surprise slowing of inflation encourage the central bank to act faster than perhaps many are expecting – giving hope to those wanting to see further movement on interest rates.

“Either way, a remedy is clearly needed to help kickstart economic growth. In our world, we have seen a really positive start to the new year with high levels of buyer registrations and mortgage enquiries. If the MPC is able to respond to this positive news at its first meeting next month, that will certainly help sustain this.”

Simon Webb, Managing Director of Capital Markets and Finance at LiveMore, said “The industry – not to mention Rachel Reeves – will welcome today’s surprising news of a drop in headline inflation in December. At 2.5% it’s closer to the Bank’s 2% sweet spot which it touched on for a moment in September last year. The markets are, however, in some flux, so the drop in inflation doesn’t necessarily equate to a drop in the Bank Rate come February.

“Many consumers will still be struggling with higher energy bills, which are likely to push the headline inflation rate higher over the coming months until it drops off in the second half of 2025. The good news for people aged 50 to 90 years plus – who might ordinarily have very limited mortgage options especially in these conditions – is that on the market today there is a much wider range of products developed specifically for them including standard, retirement and equity release options to help with areas such as debt consolidation and to provide drawdown facilities if that’s right for them.”

Sarah Coles, Head of Personal Finance at Hargreaves Lansdown said “Lower-than-expected inflation numbers will be a relief for the Bank of England, and has put a February rate cut firmly in the frame. However, the threat of lingering inflation hasn’t gone away entirely – so we’re not out of the woods just yet.

“Hotel and restaurant prices helped push inflation down. Inflation for this sector was its lowest since 2021, and slightly down over the month. Hotel prices played the biggest role. They’ve risen substantially in recent years, and have started to ease off, partly as the mix of travellers rebalances towards holidaymakers looking for a bargain.

“Alcohol and tobacco inflation also eased, largely because rises in duty a year earlier had been higher – particularly for tobacco. Alcohol prices fell as usual in December, as the industry focused on shifting discounted festive booze, but they actually fell less than the same time a year earlier.

“Food and drink price inflation remained at 2%, despite prices rising 0.5% in a month. Poor harvests in a number of areas have pushed up the prices of trolley favourites, including olive oil, up 22.3% in a year and chocolate up 11.7%. This is partially offset by price falls elsewhere – with annual drops in the price of everything from pasta to jam. However, with the threat of higher wage costs for supermarkets and producers, there’s every chance this isn’t the last we’ve seen of food inflation in 2025.

“Air fares rose as usual during the month, but far less than a year earlier. In fact, it was the lowest December rise since 2019, and the third lowest since the ONS started collecting this figure in 2001. Part of this was purely down to the timing of when the data was drawn – on Christmas Eve and New Year’s Eve, when demand is much lower and prices fall to attract travellers.

“This is welcome news for mortgage borrowers, who will have been braced for higher inflation. Lower inflation could help suck some of the drama out of the bond markets, which could keep a lid on the rise in fixed rate mortgages. The impact so far has been relatively muted, with Moneyfacts figures showing the average 2-year fixed rate has risen from 5.47% to 5.49%. Banks have been waiting to see whether this tempest blows itself out, and there’s the chance that today’s news may convince some of them to keep waiting a little longer.”