UK inflation fell back for the second consecutive month in December to 10.5% but remained at one of the highest levels in 40 years as the cost of living crisis continued.
The Office for National Statistics said the annual rate as measured by the consumer prices index dipped again last month, continuing a fall from 10.7% in November and its recent peak of 11.1% in October.
However, the pace at which food prices increased was well above the overall rate, rising by 16.8% in the year to December – the biggest annual jump since 1977.
It comes after Rishi Sunak promised to halve the rate of inflation this year as the cornerstone of his plans for the economy.
The Chancellor, Jeremy Hunt, said: “High inflation is a nightmare for family budgets, destroys business investment and leads to strike action, so however tough, we need to stick to our plan to bring it down.”
Bank of England officials, concerned about the dramatic rise in prices over the past year, are expected to increase interest rates again at their meeting next month.
Some analysts said the central bank could increase rates by as much as 0.5% to make borrowing more expensive and increase unemployment to combat the demand for goods and services.
Others cautioned that inflation was governed by the global prices of energy and food, which had already begun to decline, allowing the Bank’s policymakers to signal an early end to further interest rate rises.
The modest drop in December’s CPI was driven mainly by a significant fall in petrol and diesel prices and a decline in clothing prices growth compared with the same month in 2021.
The ONS chief economist, Grant Fitzner, said petrol fell by 8p a liter and diesel prices slumped by 16p over the course of December.
The price of some basics, including bread and cereals, increased in December, but at a slower rate compared with the previous month, while clothing fell 0.05% month on month, easing some of the pressure.
However, the price of milk, cheese and eggs jumped by 4.1% between November and December, compared with a smaller rise of 1.5% between the same two months in 2021.
There was also sufficient momentum behind price increases in the services sector, and especially hospitality and leisure, to keep prices rising strongly.
Fitzner, blamed an increase in wage costs across many services industries for the rise in prices, especially in hotels, bars and the leisure industry.
Philip Shaw, a senior economist at Investec, said the persistently high rate of inflation meant the Bank of England’s monetary policy committee, which sets the Bank’s base rate, “is nowhere near declaring victory over inflation”.
Shaw said the shortage of workers in many industries because of the large number of long Covid cases, a rush to early retirement among the over-55s and visa restrictions on workers from the EU meant the central bank would have little choice but to raise rates further .
Business surveys have shown wages rising strongly among low-income workers and at the top end of the income scale, while the wages of middle income workers have stagnated.
Official labor market figures earlier this week showed City workers, accountants and lawyers secured the highest pay rises, while public sector workers fell into the lowest category.
Martin Beck, the chief economic adviser to the EY Item Club, said concerns that a tight labor market would create a wage-price spiral “should be starting to recede given that inflation has passed its peak and labor demand continues to soften”.
He said the central Bank was “likely close to the end of its tightening cycle” and the base rate was only likely to rise to a maximum of 4% before policymakers began “mulling rate cuts by the end of 2023”.