What does the latest dip in inflation mean and where are price pressures easing?

The rate of inflation dipped for the second month in a row in December, offering more evidence the peak of the cost of living crisis has passed.

The fall to 10.5% last month from 10.7% in November, shows further steady easing back from the painful 41-year high of 11.1% recorded in October.

But it has come as scant relief for households and businesses, who are still facing eye-watering prices across the board and as food price inflation hit yet another 45-year high, at 16.8% in December.

Here we look at the key questions surrounding the official figures.

– Does falling inflation mean prices are going down?

Unfortunately not. While the rate of inflation is falling, this merely shows that prices are rising more slowly than they were.

Prices on the whole are very much increasing, with inflation remaining in double-digits and still more than five times the Government’s 2% target.

– Why did inflation ease in December?

The Office for National Statistics (ONS) said the decline in the Consumer Prices Index (CPI) was driven by falls in the price of petrol and diesel, as well as clothing and footwear as retailers discounted in December.

The data showed that annual fuel price inflation dropped back sharply to 11.5% in December from 17.2% in November.

The average petrol price was down by 8.3 pence a litre month-on-month in December.

Average petrol and diesel prices are now back to the levels seen in February last year, standing at 155.3 and 179.1 pence per litre respectively in December, according to the ONS.

In clothing and footwear shops, prices rose by 6.5%, down from 7.5% in November.

The traditional post-Christmas sales returned at the end of last year after a disrupted 2021 festive season, with prices falling 0.3% month-on-month.

– Is the worst behind us?

The figures give hope that the peak in inflation has passed. Economists believe that price rises will continue to slow over the coming months and throughout 2023.

Petrol prices have come down as oil prices have fallen due to demand concerns amid a global economic slowdown, with other commodity prices also on the descent.

But price rises are not slowing across the board, with food inflation hitting the highest level since September 1977 last month, while power costs remain painfully elevated, although wholesale energy prices have fallen back in recent months.

Added to this, the Government is scaling back its energy support package from April, capping average household gas and electricity bills at £3,000 a year, up from £2,500 currently.

Businesses will also face a cut in the Government’s energy support from the end of March.

– When will Britons begin to feel the benefit of easing inflation?

Samuel Tombs at Pantheon Macroeconomics believes CPI will drop gradually to around 8.5% in April and 2.3% by the end of 2023, before dropping to around 2% in early 2024.

It is hoped that falling global commodity prices will start to bring down food price inflation soon, although the boss of supermarket Tesco said recently he believed the peak may not come until the middle of 2023.

– Are wages keeping up with inflation?

Sadly not. The cost crisis is being compounded by the fact that pay rises are falling woefully behind price hikes.

Official figures on Tuesday showed that regular pay, excluding bonuses, rose by 6.4% in the three months to November – but this marked a 3.9% drop after CPI inflation is taken into account.

This is the joint highest drop in real earnings since the three months to April 2009.

– What does falling inflation mean for interest rates?

The Bank of England will no doubt be encouraged by the second consecutive fall in the rate of inflation, but is not seen taking its foot off the pedal just yet.

Economists predict it will still look to hike interest rates, currently at 3.5%, once again next month to help rein in inflation further.

But some believe the Bank may be near the end of its run of rate hikes with inflation abating and the UK expected to be in a recession this year.