On a monthly basis, the Consumer Prices Index (CPI) measure of inflation rose by 0.4 per cent in December 2022, compared with a rise of 0.5 per cent in December 2021.
The CPI including owner occupiers’ housing costs (CPIH) rose by 9.2 per cent in the 12 months to December 2022, down from 9.3 per cent in November.
The ONS said the largest downward contribution to the change in both the CPIH and CPI annual inflation rates between November and December 2022 came from transport (particularly motor fuels), clothing and footwear.
However, it added that higher prices in restaurants and hotels, and for food and non-alcoholic beverages, was pushing inflation up.
‘Optimism that inflation has peaked’
Daniel Casali, chief investment strategist at Evelyn Partners, said the reading will encourage the belief that UK inflation has peaked. He said: “Another slowing in annual inflation – the second since October’s peak of 11.1 per cent – will add to the newfound sense of optimism in the UK economy, triggered by last week’s surprisingly positive monthly GDP growth data.
“But these are fairly marginal decelerations in prices, inflation remains elevated and together with likely negative annual GDP growth in 2023 this remains a risk for both markets and households.”
However, there are others that feel that the decrease will not be much of a respite for hard-pressed consumers.
Simon Webb, managing director of capital markets and finance at LiveMore, said: “There has been some respite recently with a fall in fuel and oil prices which has fed into the latest small, but welcome drop in inflation.
“The rise in food prices of 16.8 per cent is worrying and so is the fact that although wholesale gas and electricity prices are down, unfortunately householders will not be benefiting as energy suppliers buy energy in advance. Even if they do pass on any fall in price in a few months’ time, in April the government’s energy price guarantee goes up from £2,500 to £3,000, meaning our energy bills will still be sky high. If inflation continues to fall, it will be slowly.”
Affordability issues for borrowers
However, despite the slight drop, experts note the fact that inflation is still in perilously high and the cost of living is spiraling, meaning that, despite falling mortgage rates, affordability will continue to be a concern for the foreseeable future.
Alice Haine, personal finance analyst at investment platform Bestinvest, said: “Borrowers must remember that with inflation still in the double digits, affordability will remain an issue both for first-time buyers and those looking to remortgage. A higher cost of living hurts disposable incomes, something lenders examine carefully when assessing a borrower’s creditworthiness.
“This will have a knock-on effect on house prices. It means first-time buyers may not be able to borrow as much as they could a year ago, while those looking to refinance at a time when house prices are expected to slide may find their loan-to-income ratio is adversely affected.
“The only silver lining is that with more mortgage products available now than during the mini Budget chaos when many providers pulled products and lenders competing more aggressively for new business, mortgage rates are unlikely to jump up dramatically as interest rate rises have already been priced in.”
