UK inflation slows, but stays high
Consumer prices rise 10.5% in Dec
The rate of inflation in Britain slowed for a second consecutive month in December but was still running in the double digits, maintaining a tight squeeze on household finances.
Consumer prices rose 10.5% in December from a year earlier, down from 10.7% the previous month, with rising food prices and prices at hotels and restaurants offsetting lower gasoline and clothing prices, the Office for National Statistics said Wednesday. Food and nonalcoholic drink prices rose 16.8% in December from a year earlier, slightly faster than the previous month.
The overall declines followed a 41-year high in October, at 11.1%.
The peak appears to have passed, similar to trends in the United States, where the overall rate of inflation has been falling for six months, and in the eurozone, where the rate dipped below double digits in December. But central bankers, tasked with returning inflation to their 2% targets, are far from declaring victory.
For much of last year in Britain, the biggest driver of inflation was higher energy prices that led to more expensive household electricity and gas bills. As wholesale natural gas prices have fallen, central bankers remain concerned about the extent to which the energy shock is still feeding into the economy and the impact of the tight labour market. They see the risk of inflation becoming embedded as companies raise prices to offset higher costs and businesses significantly raise wages to attract workers in short supply when the cost of living is high.
And so policymakers setting interest rates have honed in on domestic signals of inflation to try to assess how persistent higher prices will be, analysing wage growth and increases in services inflation.
In Britain, the rate of core inflation, which strips out energy and food prices because of their volatility, held firm at 6.3% in December, the statistics office said Wednesday. Prices for services rose faster in December than the month before.
To achieve price stability, the central bank must “ensure that any selfsustaining momentum in inflation at rates above the 2% target is squeezed out of the system by constraining demand,” Huw Pill, the chief economist of the Bank of England, said this month.
Over the course of a year, the central bank raised interest rates from 0.1% to 3.5% and is expected to raise rates again at its next meeting in early February.
Separate data published Tuesday showed average wages in the three months to November rose 6.4% from a year earlier, the fastest pace on record outside the pandemic lockdowns, when changes to employment skewed the data.
But even at this pace, wages are failing to keep up with inflation. The loss of spending power, after more than a decade of slow wage growth, especially for public service workers, has been partly responsible for a wave of strikes across industries in Britain. Nurses are set to walk out again in February in a battle with the government over higher pay.
Prime Minister Rishi Sunak made five pledges to Britons this month in a speech that sought to restore optimism while the country was mired in strikes and a crisis was deepening among emergency health care workers seeking better pay. Among the promises were pledges to expand the economy and to halve inflation this year. While Britain’s growth outlook is very weak, inflation was already widely expected to fall sharply this year as the impact of last year’s jump in natural gas prices falls out of the annual calculations.
The Bank of England forecast inflation would slow to 5.2% in the fourth quarter of this year, assuming higher interest rates.