- CPI inflation fell to 2.5% in December – down very slightly from 2.6% in November. On a monthly basis, it rose 0.3%.
- Core CPI (excluding energy, food, alcohol and tobacco) was 3.2% (down from 3.5% in November) and services inflation was down from 5% to 4.4%.
- What it means for rates, savings, annuities and mortgages.
The ONS has released inflation figures for December: Consumer price inflation, UK – Office for National Statistics
Sarah Coles, head of personal finance, Hargreaves Lansdown:
“Lower-than-expected inflation numbers will be a relief for the Bank of England, and has put a February rate cut firmly in the frame. However, the threat of lingering inflation hasn’t gone away entirely – so we’re not out of the woods just yet.
Hotel and restaurant prices helped push inflation down. Inflation for this sector was its lowest since 2021, and slightly down over the month. Hotel prices played the biggest role. They’ve risen substantially in recent years, and have started to ease off, partly as the mix of travellers rebalances towards holidaymakers looking for a bargain.
Alcohol and tobacco inflation also eased, largely because rises in duty a year earlier had been higher – particularly for tobacco. Alcohol prices fell as usual in December, as the industry focused on shifting discounted festive booze, but they actually fell less than the same time a year earlier.
Food and drink price inflation remained at 2%, despite prices rising 0.5% in a month. Poor harvests in a number of areas have pushed up the prices of trolley favourites, including olive oil, up 22.3% in a year and chocolate up 11.7%. This is partially offset by price falls elsewhere – with annual drops in the price of everything from pasta to jam. However, with the threat of higher wage costs for supermarkets and producers, there’s every chance this isn’t the last we’ve seen of food inflation in 2025.
Air fares rose as usual during the month, but far less than a year earlier. In fact, it was the lowest December rise since 2019, and the third lowest since the ONS started collecting this figure in 2001. Part of this was purely down to the timing of when the data was drawn – on Christmas Eve and New Year’s Eve, when demand is much lower and prices fall to attract travellers.”
What it means for rates
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
“This inflation snapshot will come as a relief, and it’s likely to be a salve to help calm unruly markets. Consumer price increases were expected to stay in a holding pattern, or even edge slightly upwards, but the rate edged downwards, which shows inflationary pressures are easing. Consumer caution appears to be spreading, with restaurants and hotels dropping prices slightly, by 0.1% on the month, perhaps to try and lure in more reluctant customers. On an annual basis, prices still rose 3.4%, but it’s a marked change from the sharp price increase we saw earlier in the year.
Core CPI, which excludes volatile food and fuel prices is also moving in the right direction, dropping from 3.5% to 3.2%. This reading has made it more likely that the Bank of England will plump for an interest rate cut in February. Three policymakers voted for a reduction at the last meeting, given their concerns about stagnating economy. The economic picture hasn’t improved and risks deteriorating. Financial markets are pricing in the chance of a cut at above 80%.
Sterling is still bumping around at lows not seen since October 2023, as the Fed is expected to go slower than the Bank of England on interest rate cuts, which is beefing up the dollar. It’s trading at 1.18 against the euro but has started to gain back some ground.”
What this means for annuities
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown
“Inflation remains above the Bank of England’s target rate, but significantly lower than the highs we’ve seen in recent years. This will bring some comfort to people setting their budget as they enter retirement, especially as they know they will be getting an inflation-busting 4.1% increase in their state pension in April.
Those on the lookout for a guaranteed income in retirement will also be pleased to see annuity incomes riding high off the back of bond market turmoil. The latest data from HL’s annuity search engine shows a 65-year-old with a £100,000 pension can currently get up to £7,425 a year from a single life level annuity with a five-year guarantee.
These attractive numbers may make it very tempting for people to pick a level annuity over an inflation-linked product with a much lower starting income. They will need to balance the fact that the income they forfeit today by going down the inflation linked route will be rebuilt by higher incomes in the coming years. However, this also needs to be set against the fact that it will take several years for an inflation-linked annuity to deliver the same amount as a level product, so it’s a decision that needs to be considered carefully.”
What this means for savings
Mark Hicks, head of Active Savings, Hargreaves Lansdown:
“A lower-than-expected inflation print will provide some relief to the recent sell off in gilts that we’ve seen so far this year. This has already had a knock-on effect in the savings market, particularly for fixed rate deals of 2 years and over, where rates have risen 15-20bp.
This is likely to put the brakes on the recent rises that we’ve seen so far this year. However, given that the savings market has lagged the move in gilts and swap rates, we may still see some sustained pressure on banks to keep tweaking fixed rates higher. With two cuts still priced in for this year, but longer-term expectations of any further cuts reducing, it feels as if fixed rates may finally have steadied and may even be on the up over the medium term after the consistent declines throughout 2024.
Lower inflation gives the Bank of England more room to cut rates sooner, which would put easy access rates under continued pressure. Fixed terms now offer higher rates than easy access products, and so the market has normalised, which is all great news for savers.”
What this means for mortgages
Sarah Coles:
“This is welcome news for mortgage borrowers, who will have been braced for higher inflation. Lower inflation could help suck some of the drama out of the bond markets, which could keep a lid on the rise in fixed rate mortgages. The impact so far has been relatively muted, with Moneyfacts figures showing the average 2-year fixed rate has risen from 5.47% to 5.49%. Banks have been waiting to see whether this tempest blows itself out, and there’s the chance that today’s news may convince some of them to keep waiting a little longer.
If you’re on a fixed rate with plenty of time to run, this will bring some comfort. Rates may rise a little from here, but it could be a relatively short-term shift, and while it’s going to be painful while it lasts, it will ease. The overall direction of the mortgage market in the coming years is still expected to be downwards.
If you’re in the market for a remortgage soon, the bad news is that you’re still going to be remortgaging onto a higher rate than your current one. The HL Savings & Resilience Barometer shows that on average, mortgage holders have £363 left at the end of the month, so those with bigger mortgages could end up in hot water after an expensive remortgage. Mortgage rates have fluctuated in recent months, and it doesn’t look like they’re going to calm in the immediate future. It means it may be worth locking in a rate as soon as you can. That way if rates fall back again before you need the deal, you can shop around, and if they’re higher when your remortgage rolls around, you’ll have secured a better rate.”
