Consumer price rises dipped in the UK in December, with upstream inflationary pressures easing more sharply than expected as fuel and materials costs edged lower.
The headline consumer price index (CPI) showed the annual rate of inflation dipped to 3% in December in line with market forecasts, down from 3.1% in November.
Breaking down the data showed that the impact of rising oil prices was largely offset by the falling costs of air travel.
Relief for households
Had the annual rate remained at 3.1% or moved higher, the Bank of England's governor Mark Carney would have been obliged to write another letter of explanation to Chancellor of the Exchequer Philip Hammond.
It remained too early to predict a rebalance between inflation and wage growth - the pace of annual wage growth at 2.5% still lags inflation - but pressures on household budgets were expected to see some relief in the coming months.
Jacob Deppe, head of trading at Infinox, said: "Continuing price rises are unhelpful for households struggling with below inflation wage rises but perhaps there is a chink of light at the end of the tunnel.
“For the moment the simple fact is wages are still running below living costs even if the gap has narrowed ever so slightly."
Inflation pressures easing
Carney and the monetary policy committee (MPC) would now expect that December's dip is the beginning of the drop in consumer prices that the Bank had forecast several months ago as the impact of last year's weak pound diminishes.
Paul Hollingsworth, senior UK economist at Capital Economics, said: "As a result, the MPC is unlikely to feel pressured into raising rates again very soon.
"Indeed, barring a big pick-up in wage growth in next week’s labour market figures, there is little in the latest economic data to justify another rate hike at the MPC’s meeting on 8th February."
Price rises also eased further down the supply chain - another indication that inflationary pressures are easing.
Input producer prices - the costs of materials and fuel in the manufacture of goods - rose by an annual 4.9% in December, down sharply from November's rate of 7.3%, although output prices - also called factory gate inflation - remained a little sticky, up 3.3% in December after a 3.1% rise in November.
"The continued weakness of underlying price pressures means that the MPC has little need to rush the next rate hike," said Samuel Tombs at Pantheon Macroeconomics.
The pound was weaker as expectations of further short-term Bank rate increases faded. Sterling fell 0.26% against the dollar to $1.3757 and was flat against the euro at €1.1251.