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
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.
“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.”
Nic studied for a BA in journalism at Cardiff University, and has an MA in magazine journalism from City University. She joined MoneyWeek in 2019.
Who is the richest person in the world?
The top five richest people in the world have a combined net worth of $825 billion. Who takes the crown for the richest person in the world?
By Vaishali Varu Published
Top 10 stocks with highest growth over past decade - from Nvidia, Microsoft to Netflix, which companies made you the most money?
We reveal the 10 global companies with the biggest returns since 2013. One firm has posted an astonishing 9,870% return, meaning a £1,000 investment would now be worth almost £82,000.
By Ruth Emery Published
UK wages grow at a record pace
The latest UK wages data will add pressure on the BoE to push interest rates even higher.
By Nicole García Mérida Published
Trapped in a time of zombie government
It’s not just companies that are eking out an existence, says Max King. The state is in the twilight zone too.
By Max King Published
America is in deep denial over debt
The downgrade in America’s credit rating was much criticised by the US government, says Alex Rankine. But was it a long time coming?
By Alex Rankine Published
UK economy avoids stagnation with surprise growth
Gross domestic product increased by 0.2% in the second quarter and by 0.5% in June
By Pedro Gonçalves Published
Bank of England raises interest rates to 5.25%
The Bank has hiked rates from 5% to 5.25%, marking the 14th increase in a row. We explain what it means for savers and homeowners - and whether more rate rises are on the horizon
By Ruth Emery Published
UK wage growth hits a record high
Stubborn inflation fuels wage growth, hitting a 20-year record high. But unemployment jumps
By Vaishali Varu Published
UK inflation remains at 8.7% ‒ what it means for your money
Inflation was unmoved at 8.7% in the 12 months to May. What does this ‘sticky’ rate of inflation mean for your money?
By John Fitzsimons Published
VICE bankruptcy: how did it happen?
Was the VICE bankruptcy inevitable? We look into how the once multibillion-dollar came crashing down.
By Jane Lewis Published