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UK Inflation Eases Unexpectedly To 3-Year Low

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UK consumer price inflation eased to a three-year low in December, which is likely to force more policymakers to favor a rate cut as soon as later this month.

Data from the Office for National Statistics revealed that inflation slowed to 1.3 percent in December, while it was forecast to remain unchanged at 1.5 percent. This was the lowest since November 2016.

"Inflation eased in December as prices for hotel stays dropped. Women's clothing prices also fell with more items being discounted," ONS Head of Inflation Mike Hardie said.

Core inflation that strips out energy, food and alcoholic beverages, slowed to 1.4 percent from 1.7 percent a month ago.

On a monthly basis, overall consumer prices remained flat after rising 0.2 percent in November. Prices were expected to rise again by 0.2 percent in December.

The inflation figures might be enough to tip the balance on the Monetary Policy Committee of the Bank of England towards an imminent rate cut, Ruth Gregory, an economist at Capital Economics, said.

The economist said everything now depends on the data over the coming weeks. If the figures fail to improve, rates could be lowered by 25 basis points to 0.50 percent as soon as January 30.

BoE policymaker Michael Saunders said on Wednesday that it would be appropriate to maintain an expansionary monetary policy stance and possibly to cut rates further to reduce the risks of a sustained undershoot of the 2 percent inflation target.

Governor Mark Carney last week said the Bank of England has enough room to cut interest rates by a total 250 basis points as well as to increase the size of its asset purchases.

Another policymaker Gertjan Vlieghe, early this week, said he would favor a rate cut if the economy showed signs of weakness.

Data from ONS also showed that output price inflation accelerated to 0.9 percent in December from 0.5 percent in November. This was the first time the rate has picked up since July 2019. Prices were forecast to grow 1 percent.

Month-on-month, output prices remained flat, following three straight months of negative change.

At the same time, input prices decreased for the fifth consecutive month. Input prices fell 0.1 percent annually, slower than the 1.9 percent decline in November and forecast of -0.9 percent.

On a monthly basis, input price inflation fell to 0.1 percent from 0.5 percent in November.

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