Bond yields fell back in early trading today as consumer price inflation data for December came in below expectations.
This morning, the Office for National Statistics released its latest inflation report showing the Consumer Prices Index (CPI) was 2.5% in the 12 months to December 2024, down from 2.6% in the 12 months to November.
Market expectations were that inflation would stay put at 2.6% or even rise slightly higher in December.
The CPI including owner occupiers' housing costs (CPIH) rose by 3.5% in the 12 months to December 2024, unchanged from November.
Gilt yields fell on the news – with benchmark yields on ten year gilts dropping from a close of 4.895% yesterday to 4.812% and yields on 30 year paper falling from 5.450% yesterday to 5.376% at 10:30am this morning (15 January). Source: www.marketwatch.com.
Abrdn deputy chief economist Luke Bartholomew said the small tick down in inflation would have been met with a "big sigh of relief" in both the Treasury and the Bank of England (BoE).
He said: "Another disappointing print could have led to a further sharp rise in gilt yields, piling further pressure on the chancellor.
"There are still material growth and inflation risks facing the UK economy, with policymakers highly focused on seeing how firms will respond to the increase in national insurance and minimum wage coming this spring. But for now, this slightly softer report should help reassure investors that the BoE can continue with its gradual easing cycle, and we expect the next rate cut in February."
Standard Life managing director for direct retail Dean Butler agreed that the fall in CPI would come as some relief to the government but cautioned on the outlook going forward.
He said: "Inflation is still above the 2% target and some economists predict it will rise again before it falls, perhaps hitting 3% in the spring. All eyes will now be on the bank ahead of February's interest rate decision – several forecasters have maintained their prediction of around three rate cuts in 2025, but as price rises seem sticky we're likely to see a cautious approach this year."
