Prices in the UK are no longer rising as fast as wages, official figures show.
However, December's 4% inflation rate remains well above the Bank of England's target, meaning there will be a knock-on effect on interest rates.
What does inflation mean?
Inflation is an increase in the price of something over time.
For example, if a bottle of milk costs £1 but costs £1.05 a year later, the annual milk inflation rate is 5%.
How is the UK inflation rate measured?
The prices of hundreds of everyday items, including food and fuel, are tracked by the Office for National Statistics (ONS).
ONS calculates inflation by looking at price changes over the past 12 months.
One of the reasons for the 4% inflation rate in December was more expensive cigarettes.
The Bank of England also takes 'core inflation' into account when determining interest rates.
This does not include energy, food, alcohol, and tobacco prices, which can fluctuate frequently to better understand price increases.
Core inflation in December was 5.1%.
Why are prices still rising?
Rising food and utility costs are the main causes of high inflation.
Demand for oil and gas has increased since the coronavirus outbreak, and prices soared when Russia invaded Ukraine and disrupted supplies.
The conflict has also reduced grain sales, causing food prices to soar.
This pushed the inflation rate to 11.1% in October 2022, the highest level in 40 years.
Since then, interest rates have fallen, but falling inflation doesn't mean prices are falling, just prices rising more slowly.
Most things are more expensive than before.
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What can be done to reduce inflation?
The Bank of England's goal is to keep inflation at 2%.
The bank raised the interest rate to 5.25% because inflation is much higher than this.
The theory is that by making borrowing more expensive, people have less money to spend. You will also be encouraged to save more as your savings rate increases.
As a result, demand for the product decreases and price increases slow.
However, this is a balancing act and risks harming the economy by increasing borrowing costs.
For example, homeowners may receive more favorable savings but face increased mortgage payments.
Companies borrow less and are less likely to create jobs. Some may cut staff and not make investments.
When will inflation fall?
Are wages keeping up with inflation?
Official statistics show that wage growth is currently outpacing price increases, but salaries are not rising as quickly as before.
Salary excluding bonuses increased by 6.2% in the last three months of 2023 compared to the same period last year.
Several industries, including railways, health care, and education, are on strike over wages.
The government has argued that large wage increases could push up inflation as businesses could raise prices.
What's happening with inflation and interest rates in Europe and the US?
Many other countries are also experiencing tightening costs of living and rising interest rates.
However, the UK's inflation rate remains higher than the EU and US.
Annual inflation in countries using the euro was estimated at 2.9% in the year to December.
The US central bank kept its key interest rate unchanged for the third time at a range of 5.25% to 5.5% at its December meeting.
