“Inflation moderated slightly to 2.5% in December but we expect headline inflation to remain above target over the coming year. Gas prices have increased over the past month as colder than average weather has driven a notable surge in demand. Meanwhile, potential trade frictions have raised concerns around supply. As a result, the Ofgem price cap is likely to rise again in the second quarter, following the increase in January.
“The Budget measures which are set to come into effect in April are expected to contribute to upward pressure on underlying inflation. Businesses may look to pass on higher employment costs to consumers and we expect this to drive an increase in core inflation in the first half of 2025.
“Despite the welcome fall in services inflation, today’s data is unlikely to change the Bank of England’s cautious approach to cutting interest rates. The pace of cuts will likely remain slow as it assesses the second-round effects from the Budget. Nonetheless, we think markets are under-pricing the number of cuts we’ll see this year, with inflation expected to moderate in the second half of the year. We expect the MPC to continue easing policy over 2025, taking base rates down to 4% by the end of the year.”
