This is down from November’s level of 2.6 per cent despite experts predicting it would hold at this level, if not rise slightly.
Core inflation, which excludes energy, food, alcohol and tobacco, rose by 3.2 per cent, down from 3.5 per cent in the previous reading.
Despite a fall, inflation is expected to increase throughout the year with many economists expecting it to rise above 3 per cent.
The yield on benchmark 10-year UK gilts – which reflect the cost of borrowing – climbed to its highest point since the 2008 financial crisis last week.
It is widely expected that inflation will increase throughout this year with many expecting it to reach 3 per cent or over.
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Robert Wood, chief economist at Pantheon Macroeconomics, said: “Inflation should rebound in the new year and rise to 3.1 per cent in April.”
One reason inflation is expected to increase is higher energy prices. Gas prices have soared recently – something households will be watching closely.
Mr Raja said: “Natural gas prices have picked up considerably on the back of cooler temperatures, lower storage levels, and the stoppage of Russian gas flows into Western Europe via Ukraine.
There has also been an increase in food prices and the rise in national living wage and the rise in employer national insurance contributions is expected to add to retail prices.
“Increases in both the living wage and payroll taxes will likely lift inflation in low-margin services sectors such as hospitality and leisure. We also see rents inflation taking longer to unwind after rising by 8 per cent in 2024.”
What does it mean for interest rates?
The reading may impact the Bank of England’s next base rate decision in February. Currently, experts are divided over whether there will be a cut from the current rate of 4.75 per cent or another hold.
What do higher inflation and interest rates mean for your money?
Mortgages
However, mortgage rates are currently expected to rise due to the worsening economy, experts have warned, causing a “significant challenge” for Rachel Reeves.
Aaron Strutt, of brokers Trinity Financial, said: “It seems likely there are mortgage price hikes on their way. With all of the uncertainty in the economy and pretty harsh tax changes announced in the Budget, mortgage borrowers are set to end up paying more and for longer.
Savings
Currently, there is strong competition in the easy access market where you can get up to 5 per cent.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “If your provider has cut its rate, it’s a reminder that there are still decent deals on offer, so it pays to vote with your feet and switch to an online bank or savings platform where you tend to get more competitive deals.”
Pensions
However, another factor to be aware of is the impact of inflation on annuity rates.
While they have been unpopular in recent years, rising interest rates have improved the annual incomes someone can buy.
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