UK inflation fell to 2.5% in December 2024, down from 2.6% in November, indicating a slower rate of price rises.

As traders await US inflation data, which could influence future monetary policy decisions, bond yields have begun to ease.

However, bond yields for 10-year gilts have reached their highest levels since 2008, raising concerns about rising borrowing costs for the UK government.

Analysts warn that the UK government may need to implement spending cuts or tax increases to comply with fiscal rules aimed at reducing debt as a percentage of GDP by 2029.

Positive employment data from the US has further bolstered the dollar's strength against the pound, adding pressure on the UK economy.

Overall, the UK's fiscal dynamics remain sensitive to rates and inflation, raising concerns about the sustainability of the pound's value.

This easing of inflation has led to increasing speculation about potential interest rate cuts by the Bank of England, with market pricing suggesting a possible 50 basis point reduction.

Chancellor Rachel Reeves's commitment to her 'non-negotiable' fiscal rules is under scrutiny, particularly as sustained high borrowing costs could challenge her stance on not raising taxes.

Concerns persist that inflation could rise again in spring 2025 due to increasing energy costs and higher employer National Insurance bills.

Despite the positive inflation news, uncertainties loom, suggesting that inflation may rise again in the coming months, indicating a turbulent economic environment.

On a brighter note, the stock market has seen a remarkable week, with the FTSE 100 rising around 3% amid these economic challenges.

On January 17, 2025, UK stocks reached an all-time high, with the FTSE 100 climbing 1% to 8,475, fueled by hopes for interest rate cuts.