The UK’s inflation rate stood at 2.5% in December 2024, marking a slight decrease from the previous month’s 2.6%. This decline signals a potential stabilization after three consecutive months above the Bank of England’s 2% target.
Inflation, the measure of price increases over time, impacts everyday items, including food, fuel, and services. For instance, if a loaf of bread costs £1 today and £1.10 a year later, the annual inflation rate for bread is 10%. The Office for National Statistics (ONS) tracks these changes through a “basket of goods,” which evolves yearly to reflect consumer habits. In 2024, air fryers and vinyl records were added, while hand sanitizers were removed.
The main measure of inflation, the Consumer Prices Index (CPI), dropped slightly in December due to falling hotel prices and slower tobacco cost increases compared to December 2023. However, inflation remains higher than the pre-pandemic norm, partly driven by sustained food and energy costs after the economic shocks of 2022.
The Bank of England plays a crucial role in managing inflation by adjusting interest rates. After peaking at 5.25% earlier in 2024, rates were lowered twice, ending the year at 4.75%. Higher interest rates make borrowing more expensive, reducing consumer spending and cooling price rises. However, they also affect mortgage holders and businesses reliant on loans.
Core inflation, which excludes volatile items like food and energy, provides a clearer picture of long-term trends. It eased to 3.2% in December, down from 3.5% in November, reflecting moderated price pressures.
While inflation has significantly declined from the 11.1% peak in October 2022, prices are still rising, albeit at a slower pace. This has affected household budgets, with many families feeling the squeeze despite average wage growth outpacing inflation for the first time in over a year.
Across Europe, inflation for countries using the euro was 2.4% in December. The European Central Bank lowered its interest rates multiple times in 2024, aiming to balance economic recovery with price stability. In the U.S., inflation rose to 2.9% in December, driven by higher energy and egg prices. The Federal Reserve also cut rates several times, signaling cautious optimism about the economy’s trajectory.
For UK consumers, these changes offer mixed implications. While lower inflation eases some financial pressures, high interest rates still challenge borrowers. Looking ahead, the Bank of England emphasizes a gradual approach to future rate adjustments amid economic uncertainties.
With the next interest rate decision scheduled for February 6, policymakers will assess global trends, wage growth, and domestic inflation data to guide their strategy.
