UK inflation falls as millions set to be hit with hefty bill hikes plus what it means for your money
THE UK’s rate of inflation has slowed in a boost for the government -we reveal what it means for your money.
The Office for National Statistics (ONS) said the Consumer Price Index (CPI) measured 2.5% in the 12 months to December.
This was down from 2.6% in November, the highest since March, and comes amidst market turmoil caused by increased government borrowing.
Most analysts had been expecting the inflation rate to stay at 2.6% in December.
The latest figures increase the chance the Bank of England (BoE) will slash interest rates at its next meeting on February 6.
However, inflation is still above the BoE’s 2% target, putting pressure on under-fire Chancellor Rachel Reeves.
Meanwhile, millions of broadband and mobile phone customers will still be hit with mid-contract price rises from around April.
This is because many providers such as EE and BT link price rises to December’s CPI measure of inflation.
Grant Fitzner, ONS’ chief economist, said: “Inflation eased very slightly as hotel prices dipped this month but rose a year ago.
“The cost of tobacco was another downward driver, as prices increased less than this time last year.
“This was partly offset by the cost of fuel and also second-hand cars, which saw their first annual growth since July 2023.”
The ONS’ latest data also reveals core CPI inflation, which strips out energy, food, alcohol and tobacco, slowed in the 12 months to December to 3.2%, down from 3.5% in November.
The latest inflation figures will be welcomed by the Bank of England, which sets a target of 2%.
The data will also provide some respite for the government after figures last week revealed borrowing reached a 27-year high, partly due to inflation.
Interest rates on government bonds have soared in recent days with investors concerned about the UK’s economic growth prospects.
As bonds fall in price, the interest rates, or yields, on them rise meaning it’s more expensive for the government to borrow money.
Rising gilt yields can mean bad news for mortgage holders who may see their monthly payments go up.
Alice Haine, personal finance analyst at Bestinvest, said: “The dip in inflation may offer the economy some breathing space from the turmoil currently engulfing financial markets, a reflection of worsening growth and inflation expectations across the globe as well as domestic challenges posed by the Chancellor’s fiscal policies, which have triggered a sell-off in gilts and seen the pound dip.
“Comfortingly, core inflation, which strips out the more volatile items such as food, alcohol and tobacco, edged down to 3.2% in December from 3.5% in November while CPI services inflation, which has been stickier, also eased back, something that might be considered encouraging by the BoE ahead of its next rate decision in early February.”
In response to today’s inflation figures, Ms Reeves said she would “fight every day” to improve people’s living standards.
She said: “There is still work to be done to help families across the country with the cost of living.
“That’s why the Government has taken action to protect working people’s payslips from higher taxes, frozen fuel duty and boosted the national minimum wage.
“In our plan for change, we were clear that growth is our number one priority to put more money in the pockets of working people.”
What it means for your money including broadband and mobile phone prices
Inflation is a measure of how much the cost of goods and services is rising over time.
Rising inflation is bad for households as it means their everyday spending power is eroded.
For example, it means the cost of your weekly food shop is rising meaning your salary is being stretched further.
With it slowing, it means the cost of living is still rising, but at a slower pace than before – this spells good news for your budget.
Broadband and mobile bills
December’s CPI measure of inflation is particularly important as lots of broadband and mobile firms use it to decide how much to increase contracts by in April each year.
From Friday, telecom companies are required by Ofcom to present mid-contract price increases in pounds and pence, replacing the previous system of increases linked to the rate of inflation and presented as percentages.
However, this only applies to those taking or renewing contracts, so a large proportion of consumers can still expect to be hit by price hikes.
Many older contracts still have price increases based on December’s inflation rate, plus an additional 3.9%.
This means many people will see their prices rise by 6.4% from March or April.
For example, someone paying £10 now will have to pay £10.64.
BT, EE, TalkTalk and Three are four providers that hike their prices based on the December measure of CPI.
Customers with other firms like O2 and Vodafone will have to wait until January’s RPI inflation figures are published next month to find out how much their contracts will go up from April.
Richard Neudegg, director of regulation at Uswitch, said: “As most broadband and mobile customers are still on contracts with annual price rises linked to inflation, today’s CPI announcement confirms the exact cost bump from April.
“Customers on inflation-linked contracts will likely pay out an estimated total of £64 million more on their broadband and mobiles per month from April this year.
“In real terms, bills are set to increase by an average of £21.99 per year for broadband and £15.90 a year on average for mobiles.”
Mortgage holders and savers
Slowing inflation is generally good news for mortgage holders as it can lead to the Bank of England lowering interest rates.
These are then passed onto homeowners in the shape of lower mortgage rates, meaning monthly payments go down.
Interest rates are expected to be cut this year, with markets expecting the base rate to go down to 4% by December.
However, lower interest rates spell bad news for savers as it means their rates fall.
Adam Thrower, head of savings at Shawbrook Bank said: “With inflation stubbornly refusing to budge below the 2% target, savers may want to act now to protect their money as we approach the end of the tax year.
“It’s like a slow drip from a leaky tap—it might not seem dramatic at first, but over time, it can quietly drain the value of your savings if your interest rate isn’t keeping up.”
Why does inflation matter?
INFLATION is a measure of the cost of living. It looks at how much the price of goods, such as food or televisions, and services, such as haircuts or train tickets, has changed over time.
Usually people measure inflation by comparing the cost of things today with how much they cost a year ago. The average increase in prices is known as the inflation rate.
The government sets an inflation target of 2%.
If inflation is too high or it moves around a lot, the Bank of England says it is hard for businesses to set the right prices and for people to plan their spending.
High inflation rates also means people are having to spend more, while savings are likely to be eroded as the cost of goods is more than the interest we’re earning.
Low inflation, on the other hand, means lower prices and a greater likelihood of interest rates on savings beating the inflation rate.
But if inflation is too low some people may put off spending because they expect prices to fall. And if everybody reduced their spending then companies could fail and people might lose their jobs.
See our UK inflation guide and our Is low inflation good? guide for more information.
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