Inflation eases for first time since June as December rate is 3%

Figures from the Office for National Statistics (ONS) show the Consumer Prices Index (CPI) eased to 3% in December, down from 3.1% in November when inflation reached its highest level since March 2012.

The outcome was in line with expectations, with some economists believing Britain’s soaring inflation has now peaked following sterling’s collapse since the Brexit vote.

However, ONS senior statistician James Tucker said it was “too early to say” whether the fall was part of a long-term trend.

The drop was largely caused by air fares, but falling price tags on clothes and toys also pulled costs lower.

The slowdown of inflation takes the pressure off the Bank of England to hike interest rates beyond 0.5% in the coming months.

Sterling slipped against the US dollar following the announcement, falling 0.2% to 1.37. Against the euro, the pound was broadly flat at 1.12.

Yael Selfin, chief economist at KPMG UK, said the inflation fall will provide a “small relief” to households, but oil prices could keep everyday costs higher.

She added: “A rise in oil prices together with the lagged effect of sterling’s earlier falls, which is expected to take some time before being fully passed on to consumers, will continue to provide upward pressure on prices.”

The lion’s share of the downward pressure in December came from air fares, which counted for a smaller slice of the basket of goods and services in 2017 than the year before.

It means the cost of air travel dragged on overall prices, despite growing by 52.8% month-on-month in December, compared with a 48.9% rise in 2016.

Food and non-alcoholic drinks also recorded smaller monthly growth of 0.6%, down from 0.8% in December 2016.

The smaller expansion was partly driven by a fall in the cost of vegetables, including premium crisps.

In contrast, tobacco was applying upward pressure in response to tax increases announced in the autumn Budget.

Costs lifted by 2.7% month-on-month in December, compared with a 0.2% rise for the same month in 2016.

At the pumps, motorists were facing higher fuel costs, with petrol up by 0.8p per litre on the month to 119.9p per litre.

Diesel also rose by 0.7p to 123.5p.

Howard Archer, chief economic adviser to the EY ITEM Club, expects inflation to ease as 2018 progresses.

“Admittedly, the rise in Brent oil prices to a three-year high of $70 a barrel in mid-January increases the risk that inflation could be sticky in the near term.

“Specifically, we expect consumer price inflation to fall back to 2.1% by the end of 2018.”

See Morning View (p20)