British inflation unexpectedly slowed to 2.5% in December, easing pressure on Chancellor Rachel Reeves and clearing the way for the Bank of England to continue cutting interest rates next month.
Consumer price inflation was down from November's 2.6%, driven by lower restaurant and hotel prices. Analysts last month expected inflation to remain stable.
Wednesday's data will come as a relief to Reeves, who is grappling with rising borrowing costs and fears the UK economy could enter a period of stagflation, with slow growth accompanied by persistent price pressures.
But economists still expect inflation to accelerate again in the coming months, especially given that December's decline was driven by volatile factors such as lower airfares.
"There's still a lot of work to be done to help families across the country afford the cost of living," Reeves said Wednesday, insisting she would "fight every day" to grow the economy and improve living standards.
The British government's borrowing costs have risen recently, hitting a 16-year high last week, potentially leaving a hole in the chancellor's pledge to balance daily spending with tax revenue by 2029.
However, Wednesday's inflation data triggered a rise in British government bonds, causing the 10-year government bond yield to fall 0.08 percentage points to 4.81% in early trading.
Sterling strengthened after the news, rising 0.1% to $1.222.
"This morning's inflation data will give Chancellor Reeves a sigh of relief after a difficult start to the year," said Zara Knox, an analyst at JPMorgan Asset Management.
She added that stronger inflation data could be a "catalyst for further volatility in the gilt market".
The ONS report comes as the Bank of England's Monetary Policy Committee prepares to hold its first meeting of 2025 next month.
After the data was released, traders saw an 80% chance of a 25 basis point rate cut in February, based on levels implied by swap markets, compared with about 60% previously.
Rob Wood, UK economist at Pantheon Macroeconomics, said the lower-than-consensus inflation data gave the Bank of England "a window of opportunity for a rate cut in February."
However, he described the figure as a "temporary relief" and added that the sharp drop in airfares could be reversed in January.
Data on Wednesday showed services inflation, a measure of underlying price pressures closely watched by the Bank of England, slowed sharply to 4.4% from 5% previously.
The data was also lower than economists' expectations of 4.9%.
Core inflation, which excludes food and energy, fell to 3.2% from 3.5%.
The figures come as Reeves faces growing pressure over the fallout from decisions she made in October's budget, including an increase in employers' national insurance contributions.
The chancellor on Tuesday dismissed calls for her resignation after Tory MP Mel Stride accused her of being part of a "Shakespearean tragedy" amid turmoil in bond markets.
Stride welcomed Wednesday's inflation data but warned there were "still challenges ahead" and employers' national insurance rises "have not yet taken effect" and could lead to higher prices.
Lib Dem Treasury spokesperson Daisy Cooper said the unexpected fall in inflation offered "a glimmer of hope, but the reality is the UK economy is still in deep trouble".
She added that growth was "going nowhere" after the government's "destructive" increase in employer national insurance.
US Treasury chief secretary Darren Jones said on Wednesday the pressure on Reeves over market turmoil was "unfair", telling LBC many of the problems were down to "global movements in international markets", noting Other countries face similar challenges.