Breaking down 2024 inflation
7 February 2025
Inflation fell in 2024, dropping to 2.5% from 4.0% in 2023. So why didn’t it feel like that?
At the end of 2022, inflation in the UK, as measured by the Consumer Prices Index (CPI), was 9.2%, having reached a high of 11.1% in the previous October. In 2024, inflation ended the year at 2.5%, with the Bank of England’s target range of around 2%. The US has seen a similar pattern, although its peak was 9.1% in June 2022. Despite annual CPI inflation falling to 2% by the time of the 2024 elections, the cost of living was a major factor in why the incumbent party lost power in both countries.
Those election results were a reminder that the economist’s view and the public’s view of inflation differ greatly. The economist has a strictly mathematical 12-month view, whereas public perceptions are longer term and often more focused on specific items. One way to understand this is to examine some of the detailed 2024 UK inflation annual figures and compare them with the three-year price increases (December 2021–December 2024).
Overall
In 2024, CPI inflation was, as we said, 2.6%. However, over the three years, prices had risen in total by 17.4%, equivalent to 5.5% a year.
Food and non-alcoholic beverages
This is a high-profile category, which has seen a whiplash pattern of inflation, soaring to 16.8% in 2022 and then plummeting to 2.0% in 2024. Over the three years, price increases totaled 28.7%, equivalent to 8.8% a year. Some items in this category experienced much sharper rises – oils and fats jumped nearly 56%.
Restaurants and Hotels
This is the largest category in the CPI, accounting for about one seventh of the total ‘shopping basket’. Over three years it was up 23.2%, while in 2024 it added 3.4%, making it the largest contributing category to 2024 inflation.
Transport
If you guess this, you will almost certainly be wrong. Over the three years, transport costs rose in total by just 5.4% and in 2024 they fell remarkably to 0.6%. Most people remember the pump price jumps of the Ukraine war, but forget their unwinding, helped by freezes on fuel duty.
Whichever way you think about inflation, make sure your financial planning takes it into consideration.
Salary sacrifice has become an increasingly common way for employees to make their pension contributions, with most major employers offering schemes. It currently has some important advantages for employees over choosing to pay contributions from the after-tax salary: There are no employee national insurance contributions (NICs – at up to 8%) on the salary sacrificed. Similarly, there are no employer NICs (generally at 15%) on the salary foregone. A part of this saving – or possibly all of it – could find its way into enhancing the pension contribution. Full income tax relief is effectively received immediately, whereas, in many instances, tax relief on personal contributions may be only at the basic rate initially, with the balance reclaimed later from HMRC. While the income tax relief will remain unchanged from 2029/30, the NICs exemptions will be capped on the first £2,000 of sacrificed salary. Example of salary sacrifice reform The example below shows how salary sacrifice works now and how it will work from 2029/30 for a higher rate taxpayer (outside Scotland). The employee chooses to divert £5,000 of their salary to a pension, with their employer putting two-thirds of their NICs saving (10% out of 15%) towards the pension contribution.
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