UK Inflation fell last month, after a reduction in hotel prices, new official figures show.

The rate of Consumer Prices Index inflation fell to 2.5% in December from 2.6% in November, the Office for National Statistics said.

It's a surprise drop, albeit not a huge one, as analysts had been expecting the inflation rate to remain unchanged at 2.6% last month.

December’s headline figure nevertheless remains above the Bank of England’s 2% target level, which has raised concern for economists and policymakers amid stagnant economic growth.

Fears over so-called stagflation – where inflation is high but economic growth is low – have helped fuel a period of volatility in the financial markets over the past week.

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This has seen the value of the pound drop sharply and the cost of borrowing rise to decades-high levels, indicating weaker confidence in the economy.

Chancellor of the Exchequer Rachel Reeves said she will “fight every day” to improve people’s living standards.

“There is still work to be done to help families across the country with the cost of living,” she said.

“I will fight every day to deliver that growth and improve living standards in every part of the UK.”

Former Bank of England policymaker Michael Saunders said Downing Street will be breathing a “sigh of relief” after the surprise dip in December inflation.

A 1.9% decrease in the price of hotels, and a slower increase in prices across restaurants and cafes put the most downward pressure on overall inflation, while the cost of air fares also rose at a much slower rate in December, the ONS said.

This helped services inflation – a metric closely watched by the Bank of England – fall to 4.4% in December, from 5% in November.

Meanwhile, petrol and diesel prices increased in December, compared with November.

Grant Fitzner, the ONS’s chief economist, said: “Inflation eased very slightly as hotel prices dipped this month, but rose a year ago.

“The cost of tobacco was another downward driver, as prices increased by less than this time last year.

“This was partly offset by the cost of fuel and also second-hand cars, which saw their first annual growth since July 2023.”