BREAKING: Inflation in unexpected fall to 2.5% - what it means for your money

UK has unexpectedly fallen to 2.5% in December, latest figures show today.

This is down from the. Most experts had expected inflation to remain unchanged from this figure. Inflation had been steadily coming down in recent months and fell to 1.7% last September, its lowest level in three years. It started to rise again in October, after rose due to a change in the Ofgem price cap.

Inflation shows how the price of goods and services has changed over time, with the Consumer Price Index (CPI) being the primary measure of inflation. The Office for National Statistics (ONS) releases inflation data every month, based on a regularly updated "basket of goods" and services that represents what households are buying.

However, the main CPI figure you see in headlines is used to represent an average. This means the individual prices of some goods may be higher or lower than this main figure. When inflation is lower, it does not mean prices have stopped rising - it just means they're going up at a slightly slower rate than before. For example, the rate of inflation is now at 2% - so this means an item that cost £1 last year would now cost £1.02.

The Bank of England increased interest rates over the course of almost two years to try and lower inflation. The base rate influences the interest rate you're offered by banks and lenders - so when it is higher, borrowing becomes more expensive and this means people have less money to spend elsewhere. When people spend less money, this brings down demand and lower prices, which should then lower inflation.

But a higher base rate has pushed up mortgage payments for millions of homeowners, leaving households financially stretched. The base rate stood at just 0.1% in December 2021. It reached a peak of 5.25% in August 2023. It was finally cut to 5% in August 2024, with a further cut to 4.75% confirmed in November 2024.

Inflation began to rise in 2021 and peaked at 11.1% in October 2022. The steady increase was largely due to higher costs of energy and food. Demand for energy increased after and then this was exasperated by the Russian invasion of . The war also pushed up food prices, due to rising costs for fertilisers and animal feed. Both energy and food price rises have come down in recent months, although they are still higher than before.

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