by Xinhua writer Zhang Yadong

LONDON, Jan. 18 (Xinhua) -- Britain's Consumer Price Index (CPI) unexpectedly declined in December, drawing concerns about inflation and monetary policy outlook.

The Office for National Statistics (ONS) reported Wednesday that December's CPI fell slightly to 2.5 from 2.6 percent in November. The core CPI decreased to 3.2 from 3.5 percent, while the CPI service annual rate dropped to 4.4 from 5 percent. These figures surpassed market expectations, as earlier surveys had predicted CPI to remain steady at 2.6 percent.

Grant Fitzner, chief economist at the ONS, pointed out that the price declines in sectors such as hotels and tobacco offset rising energy costs. Easing inflation provided relief for the British Treasury, which has been grappling with concerns over economic and fiscal stability.

Commenting on the latest figures, Chancellor of the Exchequer Rachel Reeves emphasized that promoting economic growth remains the government's top priority, though much work remains to be done.

From firms' perspective, the impact of this decline in prices might be limited. Companies face mounting cost pressures due to fiscal measures set to take effect in April, including increases in National Insurance Contributions (NICs) for employers and a rise in the minimum wage.

These policies are forcing many businesses to raise prices to offset higher costs. According to a recent survey by the British Chambers of Commerce (BCC), 75 percent of firms reported that rising labor costs have compelled them to increase their product and service prices.

Stuart Morrison, research director at the BCC, welcomed the slower pace of inflation but highlighted its insignificance in altering the broader economic picture.

Labor cost pressures remain acute, particularly in the hospitality sector, where most companies expect to hike prices in the next three months.

Similarly, a survey by the British Retail Consortium (BRC) echoes the trend. Some 67 percent of 52 chief financial officers surveyed by the BRC plan to raise prices in response to higher NICs.

BRC Chief Executive Helen Dickinson warned that new fiscal measures are likely to push costs up by an additional 7 billion British pounds (about 8.52 billion U.S. dollars) by 2025 for retailers. Given the slow-growing nature of the market and low-profit margins, most retailers have no choice but to raise prices. So she expects steady increases in food inflation throughout the year.

Research institutions have reached a general consensus on the trajectory of Britain's inflation. Monica George Michail, an assistant researcher with the National Institute of Economic and Social Research (NIESR), forecasts "headline inflation to rise in January 2025 due to base effects from last year dropping out, before slowing again."

Some analysts argue that the new inflation data may allow the Bank of England (BoE) to cut rates in February, while some others say more data is needed to support any changes in the interest rate due to significant inflationary pressures persisting in the economy.

"The path ahead on interest rates this year is likely to remain slow and cautious," said Morrison. "The upcoming Trump presidency has heightened global uncertainty and inflation expectations."

Professor Huw Dixon of NIESR said, "Inflationary pressures are still with us: given the additional geopolitical uncertainties, we believe that the BoE should hold off further interest rate cuts until inflation is moving back down again to target in 2025."

The BoE is scheduled to announce its new policy decision in February with the base rate currently standing at 4.75 percent. KPMG's latest economic outlook report forecasted that Britain's inflation will remain stubbornly high, with the 2-percent target unlikely to be achieved before 2027. Enditem

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