In December 2024, the annual CPI rose by 2.5 percent, slightly easing from November's 2.6 percent, while monthly growth rose to 0.3 percent. Transport costs drove upward pressures, offset by a decline in restaurant and hotel contributions. Core CPI remained a concern at 3.2 percent, albeit down from 3.5 percent in November, signalling persistent underlying price pressures despite improvements.

The CPI goods annual rate increased to 0.7 percent, reflecting stronger goods inflation, while services inflation softened significantly from 5.0 percent to 4.4 percent, hinting at sectoral shifts in cost dynamics. Similarly, the broader CPIH remained steady at 3.5 percent annually, with monthly gains slowing to 0.3 percent. Core CPIH dipped to 4.2 percent, showing some relief but reflecting substantial inflationary pressures in services, where rates eased from 5.7 percent to 5.4 percent.

The cooling of headline and core measures suggests some progress in inflation control, though elevated transport and service costs may continue to challenge consumers. Overall, the data suggests a cautious, wait-and-see approach at the next policy meeting, focusing on consolidating gains in inflation control without undermining economic momentum. The latest update leaves the RPI at minus 26 and the RPI-P at minus 31. This means that economic activities, in general, are lagging behind expectations for the UK economy.

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.