Inflation slowed for the second month in a row in December with the Consumer Prices Index (CPI) coming in at 10.5% over the 12 months to the end of 2022, from 10.7% the month before.
But the figure remains near historic highs as prices continue to be driven up by the high cost of energy, food and non-alcoholic beverages, the latest data from the Office for National Statistics (ONS) showed.
Breaking down the UK inflation figures
According to the ONS, the rate of inflation for housing and household services remained the same at 26.6%, primarily due to the high cost of electricity and gas. Despite the government’s energy price guarantee, the cost of energy for households has jumped significantly over the past two years.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Food prices increased 16.9% year-on-year (YoY), compared to 16.5% the month before, their 17th consecutive increase as households. Higher prices for milk, cheese and eggs were mainly responsible for the growth.
At the other end of the spectrum, the falling price of motor fuels helped inflation in this category fall from 7.6% in November (YoY) to 6.9% in December. That’s a notable improvement from earlier in the year. Prices in this category were 15.2% higher YoY in June.
Price growth also moderated in the clothing and footwear, and recreation and culture sectors.
However, price growth in the services sector continued to accelerate. The annual rate of inflation for restaurants and hotels rose to 11.4% from 10.2% the month before.
These figures seem to suggest inflation has peaked in the UK (CPI inflation hit a 40-year high of 11.1% in October), but households remain under significant pressure. The figure is still five times the Bank of England's (BoE’s) 2% target suggesting the central bank is likely to continue increasing interest rates.
“High inflation is a nightmare for family budgets, destroys business investment and leads to strike action, so however tough, we need to stick to our plan to bring it down,” said chancellor of the exchequer Jeremy Hunt.
“While any fall in inflation is welcome, we have a plan to go further and halve inflation this year, reduce debt, and grow the economy - but it is vital that we take the difficult decisions needed and see the plan through.”
What does inflation mean for you?
“The second consecutive monthly fall in inflation will raise hopes that peak inflation is behind us, but there is still a long way to go before inflation reverts to normal levels,” says Myron Jobson, senior personal finance analyst at interactive investor.
“For now, the ‘new normal’ of high inflation and rising interest rates threaten to squeeze household finances further.”
Runaway inflation has prompted the BoE to aggressively increase interest rates. Currently, the central bank’s base rate sits at 3.5% following its ninth consecutive increase mid-December. That’s its highest level since October 2008.
The BoE increased the base rate by 0.5% in December, following a hike of 0.75% in November.
The rate is now predicted to peak at 4.5% – previous estimates placed it at 6% by mid-2023 – and a further increase is expected when the bank next meets on 2 February.
Higher interest rates have had a knock on effect on mortgage rates.
In September, following Kwasi Kwarteng’s mini-budget announcement, they rose to an eye-watering 6.65%.
They have since eased to 5.79% and 5.63% for the average two-year and five-year deals respectively, but the property market is showing signs of a slowdown.
Indeed, most house price indexes have predicted prices will fall throughout 2023. Interest rates will remain high as long as inflation remains high, therefore so will mortgage rates.
“High inflation doesn’t just erode purchasing power, but it grates on personal wealth, with many households using up savings and leaning on credit cards to cover everyday expenses,” says Jobson.
Currently there isn’t a savings account out there offering a rate close to the rate of inflation.
But “this should not deter [savers] from seeking out a new savings deal,” says Rachel Springall, finance expert at Moneyfacts. If you are looking to secure a better rate, we have put together a list of the best deals on savings accounts which we regularly update.
“Interest rates on some of the top fixed deals have dipped since last month, as savings providers moved to adjust their market positions. Savers will need to act swiftly to grab the latest deals, as more movement is expected over the coming weeks.”
While the headline inflation figure is easing, it can “differ from your own personal inflation number, so it is worth keeping tabs on your spending habits,” says Jobson. “It may be easier said than done, but where possible, look for ways to boost your savings and pay down debt.”
-
How much pension you need to quit at 50 and enjoy a comfortable retirementThe cost of living well in retirement has jumped again, but what if you want to retire more than a decade early on a good income? It’s not cheap, but we have crunched the numbers on how to do it.
-
Growth trends such as low-carbon grids and AI boost key infrastructure — how to investOpinion Richard Sem, partner, head of Europe, and portfolio manager at Pantheon Infrastructure, highlights three favourites as he shares where he'd put his money
-
Would a food price cap actually work?Analysis The government is discussing plans to cap the prices of essentials. But could this intervention do more harm than good?
-
UK inflation jumps to 10.4% in FebruaryNews The rate of inflation increased in February following two months of falls, increasing pressure on households and the Bank of England ahead of its interest rate meeting tomorrow.
-
When will UK inflation fall back to the BoE’s target?Advice Inflation has started to slow, but it could remain high for some time as underlying pressures build
-
UK inflation falls to 10.7% but cost of living pressures remainNews CPI is down to 10.7% from last month’s 41-year-high of 11.1%
-
UK inflation hits 41-year high of 11.1%News The rising costs of energy and food have pushed the figure up to its highest level since 1981.
-
What is inflation and how does it affect you?Although we are past the worst of the cost of living crisis, the Bank of England recently said price rises could hit 3.75% later this year. What is inflation and how does it impact your personal finances?
-
UK inflation back to 10.1%News UK inflation creeps back to its 40-year high from the summer, driven by rising food costs
-
Beating inflation takes more luck than skill – but are we about to get lucky?Opinion The US Federal Reserve managed to beat inflation in the 1980s. But much of that was down to pure luck. Thankfully, says Merryn Somerset Webb, the Bank of England may be about to get lucky.
