This marks the first time inflation has fallen since September 2024.
UK inflation unexpectedly dropped from 2.6% in November to 2.5% in December, according to today’s announcement from the Office for National Statistics (ONS).
This takes it a step closer to the Bank of England’s 2% target.
Many had been anticipating inflation to continue rising, largely due to changes laid out in last year’s Autumn Budget. This further weakened hopes of any significant cuts to the Bank of England base rate in attempts to suppress rising costs.
However, with December’s figures now bucking the recent trend, this could pave the way for a cut to the UK’s central interest rate at the Monetary Policy Committee’s (MPC) next meeting in February.
The rate of inflation shows how quickly or slowly the prices of goods and services have risen over the past year. The Consumer Price Index (CPI) is the key metric used to show the inflation rate.
Remember, a drop in inflation means that prices have seen a smaller increase year-on-year compared with the previous month.
Graph: Inflation fell to 2.5% in December.
A decrease in hospitality prices was largely behind slowing inflation, with hotel and restaurant prices falling month-on-month by 0.1%. Prices rose by 3.4% in the year to December, down from 4.0% in the year to November, and now sit at their lowest point since July 2021.
Hotel prices saw a particularly notable drop as they plunged by 1.9% in the month to December. By contrast, the same sector noted a 3.1% rise one year ago.
Further calming the rate of inflation, the price of alcohol and tobacco also witnessed a slight drop of 0.2% between November and December, marking a significant change when compared to a rise of 1.2% in December 2023.
In the run-up to ISA season Cash ISAs have seen rate increases across the board, with the top four-year fixed ISA being the exception. It would be wise to assume that competition in this area could increase in the coming months as the new tax-year approaches.
Savers who have not yet made the most out of their tax-free savings would be sensible to ensure that they use any remaining balances, otherwise they may lose out. Easy access ISAs pay as much as 5%, which is positive news for those looking to maximise their returns in the short-term. However, savers could feel locking away their cash may become a more appealing option especially as there are expectations for the Bank of England to reduce interest rates.
Comparatively, the leading one-year fixed bond saw a small cut whereas the leading five-year bond increased since the previous inflation announcement, showcasing the shortening gap between shorter- and longer-term savings.
But a long-lasting return to a more ‘traditional’ savings market remains in the distant future. Easy access accounts stand to be the most improved month-on-month, with the top rate observing a 0.14% rise. As a result, the margin between easy access and notice accounts is now only minor, so savers currently tied to a notice account may not be benefiting from higher cash returns compared to its instant access counterpart. It remains to be seen how long this will be the case.
To avoid disappointment, savers would be wise to secure any enticing deals before they disappear. If consumers are unsure which account is best suited to their needs, they should seek independent advice in the first instance and carefully consider any opening restrictions.
There are currently 1,597 savings accounts that now beat the rate of inflation. You can visit our charts to compare the top easy access savings accounts, fixed rate bonds and notice accounts.
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