This decline in inflation raises the likelihood of further interest rate cuts by the Bank of England, with market expectations suggesting a potential 50 basis point reduction.

Recent strong labor market data from the US has contributed to rising global bond yields, diminishing expectations for rate cuts from the Federal Reserve this year.

UK inflation decreased to 2.5% in December 2024, down from 2.6% in November, signaling a slower pace of price increases.

However, bond yields for 10-year gilts have surged to their highest levels since 2008, reflecting rising borrowing costs for the government and raising concerns about fiscal strategies.

Chancellor Rachel Reeves faces scrutiny over her commitment to 'non-negotiable' fiscal rules, particularly as high borrowing costs challenge her stance on tax increases.

The pound has weakened against the US dollar, prompting criticism of Reeves's economic management, especially following recent tax increases outlined in the Budget.

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

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

Concerns persist that inflation could rise again in spring 2025 due to increasing energy costs and higher National Insurance bills, keeping the Bank of England cautious.

In light of a recent selloff in debt markets, the UK finance ministry emphasizes the need for strict control over public finances to maintain stability.

Experts suggest that the combination of a weak UK economy, persistent inflation, and rising yields will continue to put pressure on the pound's value.

As markets increasingly price in the possibility of an interest rate cut, Reeves may find some relief from negative media scrutiny regarding her economic management since Labour regained power.