US and UK December inflation: Sigh of relief for Fed and BoE

Some of the final economic data from the Biden era has just been released. Inflation plagued the outgoing US president's administration, and price increases remained above-target in December — but there was enough positive news to buoy markets and price in a Federal Reserve rate cut for July.

US headline inflation accelerated, as expected, to a 2.9% year-on-year pace from 2.7% in November. However, the core metric (which excludes volatile food and energy prices) unexpectedly slowed to 3.2% in December from 3.3% a month earlier.

The relatively subdued inflation report contrasted with the unexpectedly strong US non-farm payroll figures, released just days earlier – which potentially threatened to slam the brakes on the Fed's rate-cutting journey.

The Federal Open Market Committee next meets on Jan. 29, about a week after Donald Trump's inauguration. No rate cut is expected, but Fed watchers will be alert to signs that policy makers see inflation on pace to return to the central bank's 2% target.

Across the Atlantic, consumer price growth in the United Kingdom also cooled slightly in December – a welcome development for the Bank of England, which has been monitoring a sharp selloff in UK assets. Some of the central bank's rate-setters have been calling for pre-emptive rate cuts to avoid a recession.

Headline British inflation was expected to be stable, but it fell for the first time since September, decelerating 0.1 percentage point to a 2.5% year-on-year pace. Core inflation also slowed from 3.5% in November to 3.2% in December.

As our heat map shows, UK housing, utilities and education have seen inflation pick up lately, but most other sectors are broadly "colder" than they were a year ago.

The BoE's projection for price growth during the whole of Q4 (2.5% on average) proved to be accurate. The central bank still expects inflation will accelerate in the coming quarters, as our final chart shows.

The monetary authority is set to decide on interest rates on February 6th. It will also release an update of its projections for GDP, inflation and the unemployment rate – which will all be available within CEIC. Once these forecasts are revised, we retain the "old" projections in our data tree, allowing users to monitor how expectations have changed and simulate conditions at a given point in time.

If you are a CEIC user, access the story here.