These latest figures are from December 2022 and could suggest that inflation in the country may have peaked. Recently, figures from the National Statistics Office (ONS) showed that wages had grown at their fastest rate in 20 years between September and November 2022.
However, it was revealed that the real term wage did not keep pace with the prices of goods and services that increased due to inflation during the period. Households have struggled to manage financial pressures that have only been made worse by the UK’s record rate of inflation.
Chancellor of the Exchequer Jeremy Hunt said: “High inflation is a nightmare for household budgets, destroys business investment and leads to strike action, so difficult as it is, we must stick to our plan to bring it down.”
“While any drop in inflation is welcome, we have a plan to go further and cut inflation in half this year, reduce debt and grow the economy, but it is vital that we make the necessary tough decisions and carry out the plan.
“In the meantime, to help families, we are providing an average of £3,500 of support for each household this year and next.”
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Along with rising energy bills, the high rate of CPI inflation has been a major contributor to the UK’s cost of living woes.
Last year, the inflation rate hit a staggering 41-year high of 11.1 percent as the economy struggled to recover post-Covid.
In light of this, the Bank of England has raised the UK base rate numerous times in an attempt to control inflation.
Currently, the base rate is 3.5 percent, which has caused interest rates for savers to rise, but also the repayment rate for mortgages and debt.
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One of the main factors that led to this drop in the inflation rate has been the domino effect of falling gasoline prices.
According to the ONS, the largest contribution to the drop in the variation in the annual inflation rates of both the IPCH and the CPI between November and December 2022 came from transportation, particularly motor fuels.
In addition, there was a decrease in the price of clothing and footwear, as well as recreation and culture, in the period.
Despite this, there was still an increase in restaurant and hotel prices, and food and non-alcoholic beverages.
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Even with this general drop in CPI inflation, Alice Haine, a personal finance analyst at Bestinvest, cautioned that households need to be mindful of the other factors affecting the economy.
She explained: “Consumers cannot fully breathe a sigh of relief just yet. Wage growth accelerated in the three months to November, with wages excluding bonuses rising 6.4 percent annually, the largest increase since records began in 2001, not counting jumps seen during the pandemic.
“Meanwhile, the low unemployment figure of 3.7 percent, partly a reflection of continued worker shortages as economic slack remains above pre-pandemic levels due to early retirement and high long-term disease rates, it still poses an inflation risk as businesses do. they do everything they can to retain staff with extraordinary salary increases.”
Andrew Megson, chief executive of My Pension Expert, said that while the economy may have beaten early recession forecasts, consumers still need to adjust to skyrocketing bills.
He added: “On the one hand, the trend of thousands of people in their 50s and 60s coming out of retirement to bolster their pension savings amid value-eroding inflation is expected to continue; seven per cent of Britons aged 50 and over will be ‘non-retired’ by 2022, according to the latest research from My Pension Expert, and we could see the same again this year.”
Jeremy Batstone-Carr, the European strategist at Raymond James Investment Services, said Bank of England interest rates are “likely” to rise further, even with this drop in inflation.
He said: “Combined with the unexpected growth in the economy in November, we are likely to see several more rate hikes before the Bank finally believes it has done enough. Now there is light shining at the end of the inflationary tunnel. But there is still a long way to go. Inflation still far exceeds wage growth, which means that people continue to get poorer.
“The lagged effect of past rate increases is likely to deepen the economic downturn. And the Bank itself forecasts that inflation will only return to target by the end of 2024, making for a difficult two-year journey back to economic normalcy.
Kevin Brown, savings specialist at Scottish Friendly, broke down what a continued drop in inflation will mean for savers, homeowners and workers. It could be good news for private sector workers who are benefiting from rising wage packages if prices come down, as their disposable income could start to improve.
Brown added: “Those in the public sector are not so lucky, as inflation would have to drop significantly for them to see the same kind of improvement in their finances. Mortgage costs will also have a big influence on households that are remortgaging this year.” Homeowners could end up paying significantly more each month, and this could do more damage to their disposable income than inflation has done in the past two years.
“In the meantime, the message to savers remains the same for now: Shop for the best possible interest rate for any extra money you may need easy access to, and for anything beyond that, think about investing for the potential of protect your money from inflation.”