Inflation slightly down but pressure grows on food prices

Latest figures on energy and food show further changes to cost of living - CLA Senior Economics and Rural Business Adviser Charles Trotman analyses
Selection of winter vegetables

Figures from the Office for National Statistics (ONS) show that the December inflation rate fell by 0.2% to 10.5%, but still well ahead of the Bank of England benchmark rate of 2%.

The slight reduction follows on from the falls seen in November when inflation was at a 40 year high at 11.1%. Falls in energy prices and fuel underlined the reduction but food price inflation remains stubbornly high. This increased by 16.8% year-on-year.

Looking at energy prices, the wholesale gas price has fallen from a peak of 640p/therm in August last year to a current trading price of 150p/therm. The fall has been caused by unseasonally high winter temperatures in the UK and Western Europe which has led to reduced domestic demand.

As importantly, actual gas usage for businesses has fallen as many are now managing supplies more efficiently. One positive that has emerged is the decision of the US government to increase natural gas exports to the UK as part of a concerted effort to reduce costs as well as the impact of reduced Russian gas supply following the closing of the Norstream 1 gas supply pipeline. Although this is a welcome development, wholesale gas markets still remain volatile. In addition, it appears that low gas prices that were prevalent pre-Covid may now be a thing of the past with higher prices becoming the new norm.

The current high level of food price inflation reflects the ongoing increasing costs of inputs and raw materials. If, however, the forecasts for significantly lower inflation in the next few months prove correct, these costs, including the fertiliser price, should also begin to decline. Nevertheless, the rate of reduction in inflation remains unpredictable.

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Key contact:

Charles Trotman
Charles Trotman Senior Economics and Rural Business Adviser, London