Inflation creeps up in December - but don’t worry just yet

Inflation went up slightly in December to 3.4%, after falling in the previous two months - but if you feel disheartened, there are good reasons to be positive.

The bigger picture is that inflation is still set to come down this year - good news if you’re struggling with rising energy and food costs.

What’s happened?

Inflation fell to the lowest level in eight months in November - 3.2% - and that was the second monthly fall in a row.

Naturally, that led to growing confidence that we were finally turning a corner with the cost of living.

So on the face of it, December’s figures are a setback, particularly if you’re finding it hard to keep up with rising prices.

But despite what today’s headlines will say, one month’s figures don’t tell the full story.

As we pointed out earlier this week, the International Monetary Fund is predicting that inflation will fall back to the Bank of England’s target of 2% by the end of this year.

And Deutsche Bank, meanwhile, expects inflation to drop “meaningfully” over the coming months and reach “near target by spring”.

Good news, of course, doesn’t sell, so if you see alarming headlines and articles telling you it’s a “big blow to the chancellor”, remember the bigger picture.

The experts think we’re on the right track.

What is inflation?

Inflation is a way of measuring how quickly prices are going up. 

When inflation is high, your money won’t stretch as far, and everyday purchases like food, fuel and bills take up a bigger share of your budget.

Remember though that if inflation falls, that doesn’t mean prices are coming down too.

It’s just that they aren’t going up as fast.

What does inflation have to do with interest rates?

The Bank of England wants to keep inflation at around 2%.

So if inflation is too high, it can increase interest rates to make borrowing more expensive, and encourage households and business to save more and spend less.

That can, in turn, help cool price rises.

But if inflation is too low, the Bank of England might choose to cut interest rates, so borrowing is cheaper and people spend and invest more.

Last month, the Bank of England cut interest rates to 3.75% - the lowest level in nearly three years.

How is inflation measured?

The Office for National Statistics tracks inflation by comparing the prices of a virtual shopping basket each month.

This will contain everyday items like bread and milk, as well as bigger purchases like cars and televisions.

The headline inflation figure shows us how much the price of what’s in the basket has changed.

What can I do if I'm struggling with rising costs?

If you're finding it hard to keep up with everyday expenses, there are practical steps you can take.

Review your spending

Make sure you know exactly how much money you’ve got coming in and where it’s going.

You can then prioritise your spending and see where you can make savings.

Check out our guide to how to create a budget to get started.

And give our budget planner a try - it’s free and easy to use.

Check what benefits you can claim 

You might be able to get financial support from the government to help ease the pressure.

Use our benefits calculator to see what help you could be eligible for.

Get help with your debts

If you’re struggling with debt, get in touch for confidential, practical and impartial debt advice.