UK inflation falls as millions set to be hit with hefty bill hikes
THE UK's rate of inflation has slowed - but millions will still be hit with hefty bill price hikes later this year.
The Office for National Statistics (ONS) said the Consumer Price Index (CPI) measured 2.5% in the 12 months to December.
This was down from 2.6% in November, which was the highest since March and comes amidst market turmoil caused by increased government borrowing.
Most analysts had been expecting the inflation rate to remain unchanged at 2.6% in December.
The latest figures increase the chance the Bank of England (BoE) will slash interest rates at its next meeting in February.
However, inflation is still above the BoE's 2% target, putting pressure on under fire Chancellor Rachel Reeves.
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Meanwhile, millions of broadband and mobile phone customers will be hit with mid-contract price rises from around April.
This is because many mobile and broadband firms link price rises to December's CPI measure of inflation.
Grant Fitzner, ONS' chief economist, said: "Inflation eased very slightly as hotel prices dipped this month but rose a year ago.
"The cost of tobacco was another downward driver, as prices increased less than this time last year.
"This was partly offset by the cost of fuel and also second-hand cars, which saw their first annual growth since July 2023."
The ONS' latest data also reveals core CPI inflation, which strips out energy, food, alcohol and tobacco, slowed in the 12 months to December to 3.2%, down from 3.5% in November.
The latest inflation figures will come as a boost to the Bank of England, which sets a target of 2%.
It will also signal good new for the government after borrowing reached a 27-year high, partly due to inflation.
Interest rates on government bonds have soared in recent days with investors concerned over the UK's economic growth prospects.
As bonds fall in price, the interest rates, or yields, on them rise meaning it's more expensive for the government to borrow money.
Rising gilt yields can mean bad news for mortgage holders who may see their interest rates go up.
What it means for your money and broadband and mobile phone prices
Rising inflation is bad for households as it means their everyday spending power is eroded.
For example, it means the cost of your weekly food shop is rising meaning your salary is being stretched further.
With it slowing, it means the cost of living is still rising, but at a slower pace which is better for your budget.
However, December's CPI measure of inflation is particularly important as lots of broadband and mobile firms use it to decide how much to increase contracts by in April each year.
From January 17, mid-contract price rises will be shown in pounds and pence rather than rising in line with inflation.
However, those who have taken out contracts before this date may still see their packages go up linked to the December inflation figure.
Most bundles go up by inflation plus 3.9%, which means many people will see their prices rise by 6.4% from March or April.
For example, someone paying £10 now will pay £10.64 from later this year.
Slowing inflation is generally good news for mortgage holders as it can lead to the Bank of England lowering interest rates.
These are then passed onto homeowners in the shape of lower mortgage rates, meaning monthly payments go down.
However, lower interest rates spells bad news for savers as it means their rates fall.
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Adam Thrower, head of savings at Shawbrook Bank said: "With inflation stubbornly refusing to budge below the 2% target, savers may want to act now to protect their money as we approach the end of the tax year.
"It’s like a slow drip from a leaky tap—it might not seem dramatic at first, but over time, it can quietly drain the value of your savings if your interest rate isn’t keeping up."
Why does inflation matter?
INFLATION is a measure of the cost of living. It looks at how much the price of goods, such as food or televisions, and services, such as haircuts or train tickets, has changed over time.
Usually people measure inflation by comparing the cost of things today with how much they cost a year ago. The average increase in prices is known as the inflation rate.
The government sets an inflation target of 2%.
If inflation is too high or it moves around a lot, the Bank of England says it is hard for businesses to set the right prices and for people to plan their spending.
High inflation rates also means people are having to spend more, while savings are likely to be eroded as the cost of goods is more than the interest we're earning.
Low inflation, on the other hand, means lower prices and a greater likelihood of interest rates on savings beating the inflation rate.
But if inflation is too low some people may put off spending because they expect prices to fall. And if everybody reduced their spending then companies could fail and people might lose their jobs.
See our UK inflation guide and our Is low inflation good? guide for more information.
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