Inflation fell to 2.5% in December – business industry reaction

UK inflation fell in December for the first time in three months as hotel prices fell and tobacco costs eased according to latest ONS data.Annualised inflation came in at 2.5% in December, down from the 2.6% reported in November.

Menawhile, core inflation came in at 3.2% in the 12 months to December 2024, down from the 3.5% in November and lower than forecast.

Commenting on inflation figures for December, ONS Chief Economist Grant Fitzner 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.”

Mike Randall, CEO at Simply Asset Finance said “With inflation holding steady, SMEs will feel a lukewarm start to the year, casting doubt on the much-anticipated interest rate cut to warm the economic climate and kick-start 2025.”

“For businesses, this news may feel like confirmation of their fears, as many consider price adjustments ahead of April when living wage and national insurance increases come into effect. Despite this, many still show optimism for growth. Almost a fifth of SMEs we recently surveyed (19%) said they were more inclined to invest in their businesses following greater clarity on the government’s economic roadmap. Additionally, 43% expressed optimism about infrastructure improvements announced by the Chancellor.

“The full extent of the Government’s plan remains to be seen, but it is vital that we support this dedication to growth. This will ultimately form the backbone of the UK economy’s recovery, and steer us towards meaningful growth.”

Neil Rudge, Chief Banking Officer for Commercial at Shawbrook, said “After a week of disappointing economic news, a slight fall in the rate of inflation will provide a much-needed boost to UK businesses this month. Sticker than expected interest rates will be playing on SME owners’ minds however, as many will have been hoping for a more dramatic fall in borrowing costs in 2025 than is now predicted to occur. With National Insurance changes taking effect from April, managing costs will remain at the forefront . Businesses will be considering their finance options in order to manage costs, maintain cash flow and continue to invest in their business. Specialist finance has a role to play in supporting small and medium sized businesses through this period, helping to manage these challenging economic headwinds and drive growth.”

Anna Leach, Chief Economist at the Institute of Directors, said “Inflation has come in a touch lower than expected in December, bringing inflation for 2024 as a whole to 2.5% from 7.3% in 2023. Services inflation has also seen a better-than-expected tick-down to 4.4%. Inflation is expected to be fairly steady over the next few months, with services price inflation expected to remain sticky at around 5% – well above pre-Covid averages.

“The inflationary outlook is somewhat uncertain as we wait to see how the private sector reshapes around significantly higher employment costs. The huge increase in public sector spending – one of the biggest fiscal loosenings in decades – is currently expected to plug the growth gap left by a straightened private sector, as well as push up inflation. But if the recent rise in gilt yields is sustained, there’s a risk that the Chancellor will have to scale back public sector spending, pulling back growth. Meanwhile a weaker pound will put upward pressure on import prices if sustained. With so much news to absorb, it’s no surprise markets have a touch of New Year indigestion.

“The shaky start to 2025 in financial markets underscores the UK’s growth challenges. Recent market movements reflect growing concerns that the UK is heading for stagflation, as well as broader global factors.  The government’s focus on driving up investment to deliver stronger growth is the right one – any need to scale back public sector settlements in response to higher borrowing costs must protect capital budgets. To support a recovery in business confidence and to drive up growth prospects, we need strong growth messaging from the government and swift action to strip back regulation and planning restrictions, alongside tax simplification and improvements to the AI landscape.”

James Burgess, Head of Commercial at Atradius, said “UK inflation dropped unexpectedly to 2.5% in December, defying predictions of a stagnant 2.6% or an increase. This signals brighter economic prospects for 2025. Businesses and consumers have reason to feel optimistic, with the possibility of an interest rate cut later this year further boosting the UK’s financial outlook.

“However, households may remain wary of rising winter bills, especially those on fixed incomes. Combined with the Labour Government’s unpredictable actions, this news offers a cautious UK-wide lift.

“With business insolvencies still high, firms must tread carefully prioritising liquidity, diversifying supply chains, and securing credit agreements with insurance to mitigate risks.”