UK inflation slowed for the second consecutive month in December after it hit a 41-year peak in October, although economists do not expect the change to ease pressure on the Bank of England to raise interest rates.
The annual rate of consumer price inflation declined to 10.5 per cent in December, from 10.7 per cent in November and further below the 41-year high of 11.1 per cent in October, according to data published on Wednesday by the Office for National Statistics.
The decline was in line with analysts’ expectations.
Core inflation, which strips out volatile food, energy, alcohol, and tobacco prices, remained unchanged at 6.3 per cent. Economists polled by Reuters expected the rate to decline to 6.2 per cent.
Food inflation rose to 16.9 per cent in December, the fastest pace since records began in 1977. Services inflation — considered a better measure of domestic price pressure — also accelerated.
Ruth Gregory, senior UK economist at Capital Economics, said that the small fall in headline inflation and the strong underlying price pressures suggest “it is too early for the Bank of England to declare victory in its fight against inflation.” She expects the BoE to raise interest rates to a peak of 4.5 per cent in the coming months.
Markets are pricing in a 50 basis point rate increase at the next meeting on February 2. The Bank of England has raised interest rates from 0.1 per cent in November 2021 to the current 3.5 per cent in order to bring inflation down to its 2 per cent target.
The slowdown in inflation is unlikely to bring much relief to struggling households as prices remain high, with the pace of the cost of living significantly outpacing wage growth.
Jack Leslie, senior economist at the Resolution Foundation, a think-tank, said that inflation remains particularly high for low-income families “who are on the wrong side of a large cost of living gap due to the high cost of energy bills and food.”
Chancellor Jeremy Hunt, said: “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.”
The ONS noted that the slowdown in inflation was in part driven by the easing of motor fuel prices, which fell 4.9 per cent month on month.
Grant Fitzner, chief economist at the ONS, said: “Prices at the pump fell notably in December, with the cost of clothing also dropping back slightly.
“However, this was offset by increases for coach and air fares, as well as overnight hotel accommodation. Food costs continue to spike with prices also rising in shops, cafés and restaurants.”
US inflation fell to a 15-month low of 6.5 per cent in December while eurozone price rises dropped back to 9.2 per cent, as lower oil and gas costs and improving global supply chains ease price pressures around the world.
The BoE expects inflation to remain above 10 per cent in the first quarter of 2023 before falling sharply from the middle of the year.