The rate of inflation was down fractionally to 10.5% in December from 10.7% the previous month as energy and food prices remained high
Inflation eased slightly to 10.5% in December, down from 10.7% in November and a 41-year high of 11.1% in October.
The easing in the annual inflation rate reflected price drops in transport costs as petrol and diesel prices fell. There were also limited price falls in clothing and footwear, and recreation and culture, , according to the latest figures from the Office for National Statistics (ONS)..
Prices at restaurants and hotels continued to grow and made the largest impact on the inflation figures, followed by food and soft drinks. Food prices rose 16.8% in the year to December, reaching the highest level seen since 1977.
The current inflation rises in the economy is largely due to supply chain problems linked to Covid-19 and Russia’s invasion of Ukraine, which has exacerbated the cost of energy and all other goods that require energy input.
Annual inflation rates for the consumer price index (CPI) including occupiers’ housing costs (CPIH) rose by 9.2% in the 12 months to December 2022, down from 9.3% in November.
Yael Selfin, chief economist at KPMG UK, said: ‘We expect inflation to continue falling throughout this year, reaching the Bank of England’s 2% target by mid-2024.
‘Falling inflation will also come as a relief to Bank of England’s policymakers who may see this is an opportunity to slow the pace of further rate rises. With the effects of past rate rises still passing through the UK economy, we could see the base interest rate peak at 4% in the first quarter of the year.’
The Bank of England is expected to increase interest rates next month by 0.5% as it struggles to bring inflation down to the 2% target.
Commenting on the figures, ONS chief economist Grant Fitzner, said: ‘Inflation eased slightly in December, although still at a very high level with overall prices rising strongly during the last year as a whole.
‘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, cafes and restaurants.’
Average petrol and diesel prices stood at £1.55 and £1.79 per litre in December and were last lower in February 2022, when petrol was £1.47 per litre, and in April 2022, when diesel was £1.76. Fuel prices rose by 11.5% in December, down from 17.2% in November.
While inflation is easing slightly, there is considerable pressure on households.
Alpesh Paleja, the CBI’s lead economist, said: ‘The cost of living crisis will continue to be a very real problem for both households and businesses, as price pressures remain high in the short term. Against the backdrop of a recession, firms will continue to face higher costs and weak demand conditions.’
The UK’s consumer prices index (CPI) shows inflation reached 9%, up from 7% in March 2022
The rate is the highest level seen in the last 40 years with the consumer prices index rising by 9.0% in the 12 months to April 2022. The recent 2% rise was also the sharpest monthly increase since 1980.
The Office for National Statistics (ONS) stated that the 54% increase in the energy price cap in April, which took the average annual gas and electricity bill close to £2,000, was the main reason for the jump in the consumer prices index.
Higher fuel and food prices, driven by the Ukraine war, also pushed up the cost of living up, with inflation expected to continue to rise this year. The ONS also noted that the end of the temporary cut in VAT for hospitality venues, from 12.5% back to the original 20%, has also contributed to the rise.
In his official response to the figures, the Chancellor Rishi Sunak said: ‘Countries around the world are dealing with rising inflation. Today’s inflation numbers are driven by the energy price cap rise in April, which in turn is driven by higher global energy prices.
‘We cannot protect people completely from these global challenges but are providing significant support where we can and stand ready to take further action.
‘We’re saving the average worker £330 a year through reducing National Insurance contributions (NIC), changing Universal Credit to save over a million families around £1,000 a year, and providing millions of families with £350 each this year to help with their energy bills.’
There has been increased criticism of the government over their ‘lack of action’ to combat the rise of inflation as those who will be hit hardest are lower to middle-income households.
Analysis from the Resolution Foundation found that inflation actually sits at around 10.2% for the poorest tenth of households with the richest tenth having an inflation rate of around 8.7%.
The foundation stated that this is since lower-income households spend a greater share of their family budgets on energy bills where prices are rising sharply.
Azets stated that the current level of inflation is to hit businesses hard as reduced discretionary spending is likely to increase intensely as finances are squeezed.
Donald Boyd, head of growth, Azets, said: ‘My message to businesses is to be brave and have upfront conversations with customers to increase prices to absorb rising costs however, any price rise is far less forgiving in the B2C sector, where retail and hospitality in particular will be first impacted.
‘Whilst it is of little comfort to SMEs and the public, much of the inflationary pressures are resulting from higher household energy prices and fuel costs rather than anything fundamentally unsound in the economy. It may be a case of holding our nerve until inflation peaks at around 10% or above before starting to fall next year.’
The Bank of England (BoE) warned earlier this month that inflation is to leave the UK on the ‘brink of recession’ with expectations that it will peak at over 10% later this year with the further expected rise in the Ofgem’s energy tariff in October.
In a Treasury Committee meeting on Monday, the Bank of England’s chief Andrew Bailey said that the bank was ‘helpless’ when it came to rising inflation as 80% of it was caused by factors that it could not control.
In the UK, inflation spiked from 9.2% in September 1973 to 12.9% in March 1974. Inflation peaked at 24.2% in 1975 and unemployment also climbed sharply.
The knock-on effects of this included the government being forced to ration electricity, frequent power cuts, and an enforced three-day working week.