Economy  

'Nightmare' inflation eases slightly to 10.5%

'Nightmare' inflation eases slightly to 10.5%
The Iceland Food Ltd. supermarket in Crawley, UK, on Wednesday, Nov. 16, 2022. UK inflation dropped to 10.5% in December, with a lowering of food prices contributing to downward pressures. Photographer: Jose Sarmento Matos/Bloomberg

The rate of inflation dropped slightly in December as the price of fuel and clothing dropped, however concerns are growing that wage rises are embedding inflation into the economy.

The consumer price index was 10.5 per cent in the 12 months to December, the Office for National Statistics said today (January 18), a drop when compared with the 10.7 per cent seen in November.

Restaurant and hotels, as well as food and non-alcoholic beverages, were the main factors pushing prices up in the month.

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Fuels, clothing and footwear, and recreation and culture all saw lower prices.

ONS chief economist Grant Fitzner said: “Inflation eased slightly in December, although still at a very high level with overall prices rising strongly during the last year as a whole.”

Inflation has now sat above the Bank of England’s 2 per cent target since May 2021.

Marcus Brookes, chief investment officer at Quilter Investors said although energy and fuel prices are coming down, services are now driving inflation as companies have had to increase wages “just to get staff on their books”.

“Combining those cost pressures with the effect that energy prices have had and you have a cocktail for sticky inflation that refuses to budge quickly,” he said.

“It is this that the Bank of England will be fretting about when it comes to how much to raise interest rates at their next meeting.”

Chancellor of the exchequer, Jeremy Hunt, said high inflation is a “nightmare” for family budgets, destroys business investment and leads to strike action.

“However tough, we need to stick to our plan to bring it down…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.”

Rio Stedford, financial planning expert at Quilter, said inflation can have a “devastating” impact on retirement pots, as if it remains at 10 per cent, a retiree’s purchasing power will be quickly eroded if their pension is in cash.

“While the state pension will, at the very least, keep up with inflation through the triple lock, your private savings will not unless you do something about it,” he said. 

“Historically, the best way to beat inflation is by keeping money invested in the stock market but this also carries risk. 

“Choosing well diversified and risk appropriate investments is key for those nearing or in retirement particularly with the spectre of inflation looming down.”

sally.hickey@ft.com