UK inflation eases for a 2nd month, falling to 10.5%

UK inflation eased for a second month in December, boosting confidence that the cost-of-living crisis has peaked.

Consumer prices rose 10.5% in the year through December, down from 10.7% the previous month, the Office for National Statistics said Wednesday. Inflation peaked at a 41-year high of 11.1% in October.

While the drop is welcome, inflation is still running at levels last seen in the early 1980s. UK prices are also rising faster than in other major industrialized nations. Inflation slowed to 6.5% last month in the U.S. and 9.2% in the 20 countries that use the euro.

Inflation soared after Russia's invasion of Ukraine fueled sharp increases in food and energy prices, eroding savings and living standards. That has triggered a wave of strikes across Britain as nurses, train drivers, border guards and teachers demand pay increases and the government tries to prevent higher wages from triggering a second round of domestically driven inflation that could be more difficult to reverse.

"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,'' UK Treasury chief Jeremy Hunt said. "While any fall in inflation is welcome, 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.

Meeting that goal became easier after mild weather in Europe reduced demand for energy and cut prices for consumers and industry. Wholesale natural gas prices, which soared 10-fold during the first six months of the war in Ukraine, have fallen more than 60% from their August peak.

With inflation beginning to slow, attention is now shifting to how quickly it will return to the Bank of England's 2% target.

Economists are particularly focused on the cost of food and services as businesses pass on their costs to consumers.

Deutsche Bank expects the UK inflation rate to drop by 50% this year and reach the central bank's target around the middle of 2024.

"But inflation persistence will, we think, be the key theme for the year as central banks across the world tilt their focus more fully to core inflation, and in particular services prices," the bank said before the December inflation figure was released.