U.K. inflation eases for a 2nd month, falling to 10.5%

While the drop is welcome, inflation is still running at levels last seen in the early 1980s. U.K. prices are also rising faster than in other major industrialized nations. Inflation slowed to 6.5% last month in the U.S. and 9.2% in the 20 countries that use the euro.

Inflation soared after Russia’s invasion of Ukraine fueled sharp increases in food and energy prices, eroding savings and living standards. That has triggered a wave of strikes across Britain as nurses, train drivers, border guards and teachers demand pay increases and the government tries to prevent higher wages from triggering a second round of domestically driven inflation that could be more difficult to reverse.

“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,” U.K. Treasury chief Jeremy Hunt said. “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.”

The inflation rate fell in December as the price of motor vehicle fuels rose more slowly than in previous months. The cost of gasoline and diesel increased 11.5% in the 12 months through December, down from 17.2% the previous month.

But that gave little relief to beleaguered British consumers, who saw food price inflation accelerate for a 17th consecutive month. Food costs soared 16.9% in December, compared with 16.5% in November.

The price of eating out also rose, with costs for visiting a restaurant or hotel jumping 11.4% in December, up from 10.2% in November.

Inflation is expected to slow in the coming months as last year’s surge in energy prices begins to drop out of the annual inflation figures.

Consumers are also being helped by a mild winter in Europe, which has reduced demand for heating oil and natural gas and cut prices. Wholesale natural gas prices, which soared tenfold during the first six months of the war in Ukraine, have fallen more than 60% from their August peak.

With inflation beginning to moderate, attention is now shifting to how quickly it will return to the Bank of England’s 2% target.

Economists are particularly focused on the cost of services such as hotels and restaurants, as businesses pass on higher costs to consumers.

Deutsche Bank expects the U.K. inflation rate to drop by 50% this year and reach the central bank’s target around the middle of 2024.

“But inflation persistence will, we think, be the key theme for the year as central banks across the world tilt their focus more fully to core inflation, and in particular services prices,” the bank said before the December inflation figure was released.