UK inflation fell for a second straight month in December to 10.5%, but remained at one of its highest levels in 40 years as the cost of living crisis continued.
The Office for National Statistics said the annual rate, as measured by the consumer price index, fell again last month, continuing to fall from 10.7% in November and its recent peak of 11.1% in October.
However, the rate at which food prices rose was well above the overall rate, rising 16.8% in the year to December – the biggest annual jump since 1977.
It comes after Rishi Sunak pledged to halve inflation this year as a cornerstone of his plans for the economy.
Chancellor Jeremy Hunt said: “High inflation is a nightmare for family budgets, destroys business investment and leads to strike action, so as hard as it is, we must stick to our plan to bring it down.”
Bank of England officials, concerned about the dramatic rise in rates over the past year, are expected to raise interest rates again at their meeting next month.
Some analysts said the central bank could raise interest rates by as much as 0.5 percent to make borrowing more expensive and raise unemployment to combat demand for goods and services.
Others warned that inflation was being driven by global energy and food prices, which had already started to ease, allowing the Bank’s policymakers to signal an early end to further interest rate hikes.
The modest decline in the consumer price index in December was mainly due to a significant decline in petrol and diesel prices and a decline in clothing price growth compared to the same month in 2021.
The ONS’s chief economist, Grant Fitzner, said petrol fell by 8p a liter and diesel prices fell by 16p in December.
Prices of some staples, including bread and cereals, rose in December but at a slower pace than the previous month, while clothing fell 0.05% month-on-month, easing some of the pressure.
However, the price of milk, cheese and eggs jumped 4.1% between November and December, compared with a smaller rise of 1.5% between the same two months in 2021.
There was also enough momentum behind price increases in the services sector, and especially hospitality and leisure, to keep prices rising strongly.
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Fitzner blamed rising wage costs in many service industries for the rise in prices, particularly in hotels, bars and the leisure industry.
Philip Shaw, senior economist at Investec, said the persistently high rate of inflation meant the Bank of England’s monetary policy committee, which sets the bank’s key interest rate, was “not close to declaring victory over inflation”.
Shaw said a shortage of workers in many industries due to the high number of long-term Covid cases, the rush to early retirement among the over-55s and visa restrictions for EU workers meant the central bank would have no choice but to raise rates further .
Business surveys show strong wage growth among low-income workers and at the top end of the income scale, while wages for middle-income workers have stagnated.
Official labor market data earlier this week showed that city clerks, accountants and lawyers secured the highest wage increases, while public sector workers fell in the lowest category.
Martin Beck, chief economic adviser at EY Item Club, said concerns that a tight labor market would create a spiral between prices and wages “should start to ease given that inflation has passed its peak and demand of labor continues to decline’.
He said the central bank is “probably nearing the end of its tightening cycle” and the key rate is likely to rise to a maximum of 4% before policymakers start “considering rate cuts by the end of 2023.” .
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