Lower food prices helped UK inflation fall back to the Bank of England’s target rate of 2% for the first time since November 2009.
The CPI measure eased by 0.1% month-on-month, according to the Office for National Statistics (ONS), with lower meat and fruit costs the biggest contributor.
The ONS said that the collection of the data happened too early in the month to capture reported discounting by retailers in the days before Christmas.
However, there was likely to be a greater contribution to inflation from rising energy bills in the months ahead after only a minimal impact in December.
Typical contributers to inflation
1. Rises in fuel costs.
2. Housing costs
3. Food costs
The continual increases in inflation month on month since 2009 has effectively eroding the spending power of households who have seen wage growth either largely remaining stagnant or rise at a substantially lower rate.
If unemployment rate falls below 7% and the inflation rate remains at or below 2%, it’s likely the BOE will increase interest rates. This wouldn’t be the best news for landlords and homeowners on standard variable rate or tracker mortgages, but would be welcomed by savers who would gain a better return on deposits.