By Suban Abdulla
LONDON (Reuters) - British inflation figures will be closely watched on Wednesday as a sharp jump in government borrowing costs, concerns about domestic and global price pressures and a weak economy put growing pressure on finance minister Rachel Reeves.
Economists polled by Reuters expect the annual rate of consumer price inflation to remain at 2.6% in December.
That is above the 2.5% which the Bank of England forecast in early November. Last month - following higher than expected November inflation data - the BoE said it expected inflation to increase slightly further in the near term.
Services inflation, which the BoE views as a key measure of underlying price pressures, is expected by economists to fall to 4.9% in December from 5.0% the month before.
Markets on Tuesday were pricing in a 40-basis-point reduction in the BoE's Bank Rate by December 2025 - effectively one quarter-point rate cut and a 60% chance of a second.
The BoE in November said measures in Reeves' Oct. 30 budget would likely add just under 0.5 percentage points to inflation at its peak between 2026 and 2027, causing inflation to take a year longer to return sustainably to its 2% target.
Sanjay Raja, chief UK economist at Deutsche Bank (ETR: DBKGn ), said he expected the 25 billion pound ($30 billion) hike in employers' social security contributions and Britain's minimum wage to "keep price momentum sticky" in the first half of 2025.
A survey on Wednesday showed two-thirds of British retailers plan to raise prices this year in response to higher employer social security costs, adding to households' high living costs.
Investors are also bracing for inflationary pressures in the United States once Donald Trump begins his second term as president next week.
British government borrowing costs have increased for seven consecutive sessions, pushing 10-year gilt yields to their highest since 2008.
Asked about this rise and a fall in sterling, Reeves said there had been sharp market moves worldwide but Britain needed to stick consistently to new fiscal rules she had set out in October and grow the economy.
Analysts say the jump in government yields has put Reeves at risk of breaching these rules when the government's Office for Budget Responsibility updates its forecasts on March 26, leaving her with limited choices of more tax increases or spending cuts.
Sam Cartwright, economist at French bank Societe Generale (OTC: SCGLY ) said concerns about stagflation were greater for Britain than comparable economies.
"A toxic combination of stagflation and debt sustainability concerns have resulted in UK gilts being disproportionately hit in the global bond selloff," he said.
($1 = 0.8201 pounds)