UK inflation: Why a small drop matters to you

A marginal dip in the headline rate of inflation would not normally determine much, if anything.

Inflation rising at 2.5% rather than 2.6% does not change much in big economics, nor in the cost of living squeeze felt by households. The fall is entirely accounted for by falls in hotel prices and a smaller-than-usual rise in airfares in December.

But this unusually important 0.1% drop signals relief, and some respite for Chancellor Rachel Reeves, because of what underpins it.

The underlying inflation numbers, which show where price pressures are going over the year, are what is most keenly watched by the Bank of England in terms of interest rate cuts.

Core inflation, which strips out the direct impact of volatile energy and food prices is now at a four-year low, having dropped to 3.2% in December from 3.5%. Services inflation is at a two-year low of 4.4% after a chunky fall from 5%. This is the real positive news.

For the real nerds, inflation in supply chains, including in services, also indicates muted inflationary pressures.

So the inflationary picture in the UK can be cast in a rather different light. While no-one can predict exactly how the Bank of England will react, it clears away objections to an interest rate cut next month. The markets scrambled this morning to keep up, now back forecasting further rate cuts after February this year.