For a change, consumer prices moved in line with expectations in December. A 0.4 percent monthly increase matched the market consensus and trimmed the headline annual inflation rate from November's 10.7 percent to 10.5 percent, a 3-month low. Even so, the decline still left the rate fully 8.5 percentage points above the BoE's medium-term target.

The main contribution to the slowdown in the annual rate was again transport where prices rose 0.5 percent on the month compared with a 1.2 percent gain over the same period a year ago. Within this, weaker fuel prices subtracted nearly 0.2 percentage points. Elsewhere, clothing and footwear (minus 0.3 percent after 0.7 percent) and recreation and culture (minus 0.2 percent after 0.3 percent) similarly weighed. However, partial offsets were provided by restaurants and hotels, where prices climbed 0.9 percent versus a 0.1 percent fall in December 2021, and food and drink (minus 1.1 percent after minus 0.7 percent).

As a result, the core CPI rose a monthly 0.5 percent, large enough to leave the underlying inflation rate unchanged at 6.3 percent and so still only 0.2 percentage points below October's all-time high.

Consequently, despite the dip in overall inflation today's update shows that underlying pressures remain uncomfortably strong. As such, it is very unlikely to convince many BoE MPC members not to vote in favour of yet higher interest rates in February. To this end, the UK's ECDI now stands at 7 and the ECDI-P at 19, both measures indicating that economic activity in general is running a little head of market expectations.

Consumer prices are expected to increase 0.4 percent on the month in December for a 10.5 year-over-year rate. Pressures in November proved less severe than expected but were still substantial, at 0.4 percent on the month and 10.7 percent on the year.

The consumer price index (CPI) is an average measure of the level of the prices of goods and services bought for the purpose of consumption by the vast majority of households in the UK. It is calculated using the same methodology developed by Eurostat, the European Union's statistical agency, for its harmonised index of consumer prices (HICP). The CPI is the Bank of England's target inflation measure.

The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as the UK, where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer. Inflation is an increase in the overall price level of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

For monetary policy, the Bank of England generally follows the annual change in the consumer price index which is calculated using the European Union's Eurostat methodology so that inflation can be compared across EU member states.