Inflation inches down – what it means for spending and saving

CPI inflation fell slightly to 10.5% in December, from 10.7 in November and 11.1% in October. It could be downhill all the way from here – just very slowly. Now may be the time to fix your savings. Petrol prices fall again. Unfair air fares. Groceries bulk up inflation. December sales offered slim pickings. More gloom at the inn. Energy prices fell back, but the price guarantee means we won’t feel the benefit. 10 eye-watering price rises at the supermarket.

The ONS has released inflation figures for December: Consumer price inflation, UK – Office for National Statistics

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown said: “It may be downhill all the way from here, but it’s going to be such a slow decline that we can’t take our foot off the gas. Inflation eased off very slightly in December, as the threat of a global slowdown kept the price of oil lower, pushing down the price of fuel at the pumps. However, eye-watering energy price rises, food costs, air fares and hotels kept prices higher, and it seems that high inflation is going to stick around for a while. It means the pressure on our pockets is going to get worse.

In most cases, prices won’t fall, they’ll just rise marginally less alarmingly in the coming months. The HL Savings & Resilience Barometer found that wages had fallen 4% in real terms last year, and forecast that they weren’t going to make up any of the ground in 2023. It means that the ongoing battle to make ends meet will rage on.

Sticky inflation means the market is still expecting more interest rate rises in the near future, from 3.5% to around 4.5%. We could see a rise of 0.5 points when the MPC meets in February. However, as times get tougher further down the line, they’re expected to make cuts. It means that fixed rates for both mortgages and savings may well have peaked.

Now may be the time to fix your savings

Sticky inflation over the next few months may well mean we get interest rate rises, but if you’re waiting for this to happen before you fix, you may miss the boat. Rate rises in the near future are largely priced into current fixed savings rates, and lower interest rate expectations further ahead – especially when compared to what was forecast in the autumn – are also increasingly baked in. It means we’ve already seen some of the best fixed rates withdrawn, and we may well see this trend continue.

If you’re planning to opt for a fixed-rate savings account, it may pay to do it sooner rather than later. The good news is that with the best two-year fix at 4.7%, and City forecasters estimating inflation will be around 5.2% this year, and lower next year, your savings could keep up with inflation.

Petrol prices fall again

Petrol prices eased back again in December, to 155.3p for petrol and 179.1p for diesel, as the threat of global recession meant less demand for oil. It still costs a fortune to fill up at the pumps, but it’s getting less painful, with petrol up just 6.5% in a year and diesel up 19.8% – back to the kinds of prices we saw in February last year. We’re a long way from last July when petrol was up an incredible 42.9% in a year. However, more recently crude oil prices have started to creep up again, so this may not be the end of horrible price rises.

Unfair air fares

This was partly offset by soaring plane ticket prices – up 44.1%. Despite the enormous pressure on our pockets, we’re still committed to taking a break. More people booking more flights over the Christmas break meant firms ramped up prices as planes filled up. It remains to be seen how many of these holidays we can actually afford, and how many are going on a credit card, because after the locked down years we can’t bear to spend another year at home.

Groceries bulk up inflation

Food and non-alcoholic drink also bulked up inflation again – up 16.8% in a year. There were more painful rises in some of the key essentials, including, milk, cheese and eggs. Farms are under enormous price pressures as everything from animal feed to running farm machinery weighs heavily on their finances. The process of getting from the farm to the supermarket is also energy-intensive from pasteurisation to bottling, and it all adds up. The nightmare of higher food prices is that they hurt people on lower incomes more than anyone else- because they spend a larger proportion of their income on the essentials. It means a 16.8% rise has left millions of people struggling to feed their families.

December sales offered slim pickings

The price of clothes and shoes was up 6.5% in a year. Usually in December, a flurry of discounts mean prices fall during the month. This year there were decidedly slim pickings on the high street sales rails, so prices were actually up. This may be because retailers prioritised Black Friday instead, but may also be because they were desperate to hang onto their margins as the cost of everything from energy to staff went through the roof.

More gloom at the inn

There was more gloom at the inn, as overall hotels prices were up an eyewatering 18.1%. The price of overnight accommodation rose significantly, as the cost of keeping hotel rooms and endless corridors warm remained stubbornly high, and staff costs continued to soar. Meanwhile, our desire to spend as little time at home as possible remains boosted by the months in lockdown.

Energy prices power on

The Energy Price Guarantee has been protecting us since October, and we still have the lump sum payments to see us through the winter, but prices are still much higher, with electricity prices up 65.4% in a year and gas up 128.9%. We also face the prospect of losing that government support, and seeing the price guarantee rise another £500 in April, so life is going to get tougher before it gets easier. It’s no wonder that the ONS found more than half of us are worried about keeping warm at home this winter, and that around half of us are finding our energy bills difficult to afford at the moment.

10 eye-watering price rises at the supermarket

  • Low fat milk 46%
  • Olive oil 39.5%
  • Whole milk 38.5%
  • Sugar 38.5%
  • Cheese and curd 32.6%
  • Butter 29.3%
  • Pasta and couscous 29.1%
  • Flours and other cereals 29%
  • Eggs 28.9%
  • Frozen vegetables (not potatoes) 25.7%