UK inflation dips in December but remains near 40-year high

CPI inflation rose by 10.5% in the year to December, down from 10.7% in November but still remaining close to 40-year highs, the latest ONS data shows.

On a monthly basis, CPI inflation rose by 0.4% in December, compared with a rise of 0.5% in December 2021.

CPIH inflation, which includes homeowners' housing costs, rose by 9.2% in the 12 months to December, down from 9.3% in November.

The fall in inflation was largely due to falling motor fuel prices, but was offset by the rising cost of electricity, gas, and food.

Nicholas Hyett, investment analyst at Wealth Club, said: "Inflation continued to slow in December, and now looks to have peaked in October last year.

"Lower fuel prices have been a major contributor to the slowdown, and with oil prices now back around where they were before the Russian invasion of Ukraine, there's likely to be further to fall on that front. As a crucial input into other areas of the economy, lower oil and fuel prices should ultimately ease pricing pressure across the board - although it will take time for the benefit to feed through to people's purses.

"For now, the cost of living crisis is set to continue. 10.5% inflation may be better than we've seen recently but is still eye-watering by most standards. A winter of strikes ahead yet see 'stickier' wage driven inflation gathering pace too.

"Still, the government and Bank of England will be encouraged by these numbers. If inflation is trending down naturally then interest rates may not need to go so high, which will at least keep debt more digestible for consumers, companies and countries around the world."

Daniel Casali, chief investment strategist at Evelyn Partners, commented: "Another slowing in annual inflation – the second since October’s peak of 11.1% - will add to the newfound sense of optimism in the UK economy, triggered by last week’s surprisingly positive monthly GDP growth data. But these are fairly marginal decelerations in prices, inflation remains elevated and together with likely negative annual GDP growth in 2023 this remains a risk for both markets and households. The Bank of England will welcome softening inflation but for its rate-setters the receding of price pressures has some way to go before they take the foot off the rates pedal, and particularly if growth continues to surprise on the upside and if growing wage demands prove successful."

Paul McGerrigan, CEO at fintech brokerage Loan.co.uk, added: “The rate of inflation has dipped for the second month in succession, bringing some relief and an increased hope that steps taken by government and the Bank of England are starting to take effect. Number one in Rishi Sunak’s five key priorities is to halve inflation in 2023, so we expect a laser focus on this goal to be driving future decisions.

“Inflation has caused a real terms decline in wages by 2.6 per cent in the three months to November 2022, among the largest falls since comparable records began in 2001.

“Even with positive signs inflation is starting to drop – fuelled by lower energy costs and lower prices at the pumps – the bank’s Monetary Policy Committee has a critical decision to make on February 2, and it seems highly likely we’ll see a further increase in interest rates of 0.5 per cent. This will hit households without a fixed mortgage and with high levels of unsecured debt even harder as costs rise. Are they going too hard too fast or is it a necessary measure to ensure inflation drops? One thing is for sure, now is the time for advisory firms to be agile, proactive and innovative with solutions to alleviate the challenges faced by borrowers.”