A fall in December’s CPI inflation of 0.1 percentage points to 2.5% is marginal, but by being below expectations it delivered an above-expectations boost to Rachel Reeves.

The chancellor has been under intense scrutiny for the last week as UK borrowing costs have risen (in line with US and European peers) and the value of the pound has fallen.

While this has presented a political headache rather than the economic crisis presented by the opposition, it is no less real for a government that has made growth, stability and fiscal probity a priority.

Money blog:
What inflation drop means for you and economy

Strikingly the moves against the UK came unprompted by any fresh data to trigger a lack of confidence in the bond and currency markets.

This week that changes, with December’s inflation figures today followed on Thursday by GDP numbers for November.

In that context, this morning’s surprise on the upside will have been welcomed at the Treasury, particularly when the underlying numbers are analysed.

Good news from underlying figures

Core inflation, which strips out fuel and other volatile elements, fell to 3.2% from 3.5% in November, and services inflation, a key metric for the Bank of England‘s calculations, dropped 0.6% in the month to 4.4%.

Both of those falls were larger than consensus expectations and may be a sign that the ‘sticky’ inflation the Bank has consistently warned is staying its hand may be falling back.

The markets appear to think so, with expectations of a rate cut at the next Monetary Policy Committee meeting on 6 February increasing from 62% before publication, to 83% 90 minutes later.

Warning uplift could be temporary

Borrowing costs also eased in light of the figures, with the 10 and 30-year gilt yields, which have seen 16 and 28-year highs respectively in the last week, falling back as markets opened.

If that suggests a measure of perspective returning to the UK, the chancellor still faces genuine challenges.

With the cost of servicing debt elevated, her fiscal rules remain in peril, and difficult decisions on spending will follow if they bust the OBR spreadsheet in March. And she cannot evade responsibility for loading £25bn of employment taxes on business without demonstrating that it will not, as many claim, depress growth.

In a note this morning, Pantheon Economics said it expects those measures to erase today’s good news on inflation.

The economic intelligence firm said: “Looking ahead, we expect headline inflation to rise to 2.8% in January, and then 3.2% in April as energy deflation eases, as a range of government administered and inflation-indexed prices rise and underlying services inflation persists.”

What next?

Ms Reeves will spend the next three weeks making the case for her economic plan, with a trip to the World Economic Forum in Davos next week followed by a speech on growth at the end of the month, and further staging posts in the industrial strategy, similar to the AI announcement this week.

All of which may reassure the world about Britain’s prospects, but still may not be enough.

US inflation figures, published later on Wednesday, are expected to show an increase, which may push yields up further.

And in five days Donald Trump will be in a position to begin implementing trade and tariff policies which are expected to be inflationary.

If the last week has demonstrated anything, it is that the US exerts a gravitational pull on markets the UK cannot escape.