The Consumer Price Index (CPI) dropped slightly from the 3.1% rate recorded in November – the highest rate in five years.
According to the Office for National Statistics (ONS), a fall in air fares and recreational goods, particularly toys and games, helped contribute to the downward trend.
However, this was partially offset by an increase in tobacco and fuel prices, after duties rose following the Autumn Budget.
UK consumer price inflation including owner occupiers’ housing costs (CPIH) came in at 2.7% in December, down from 2.8% in November.
While the inflation rate is 1% above the Bank of England’s 2% target, analysts have said the governor, Mark Carney, will be breathing a sigh of relief as the figure fell back last month.
Ben Brettell, senior economist at Hargreaves Lansdown, said: “Inflation’s been a hot topic since the Brexit vote caused a sharp drop in sterling 18 months ago. But logic has always dictated that once the effect of the weaker pound had percolated into the real economy, it should then start to drop out of the year-on-year calculations 12 months later.
“In January last year consumer price inflation stood at just 1.8%, but rose to what now looks like a peak of 3.1% in November. It now seems likely we’ll see the rate steadily fall back towards the 2% target over the next year or so, though the ONS reckons it’s too early to say the peak has been reached.”
Maike Currie, investment director for personal investing at Fidelity International, said: “While price pressures may have eased slightly, this will be cold comfort to cash-strapped consumers who are still suffering a pay cut in real terms as inflation continues to outpace wage growth (including bonuses) at around 2.5%.
“Inflation remains well above the Bank of England’s 2% target and British households are likely to continue to find their finances under pressure if wage growth doesn’t pick up and interest rates remain at 0.5%.”
Currie added that persistently high inflation holds implications for savings and investments as it erodes the spending power of future interest and dividend payments and eats away at the worth of your original capital.
“Investors and consumers will therefore need to not only review their spending and savings habits as they wait for that elusive pay rise, but also revisit their portfolios while they wait for inflation pressures to ease,” she said.