Steven Gerrard opened the scoring after 31 minutes and Sami Hyypia headed a second five minutes later, but David Edgar pulled one back on the stroke of half-time.
Ryan Babel added a third five minutes after the break. Gerrard raced clear for a fourth and Xabi Alonso made it five from the spot.
Despite the emphatic victory, assistant boss Sammy Lee is confident that the title hopefuls have yet to hit their peak.
"I hope not," Lee told Sky Sports News when asked Liverpool had hit their best form.
"There's more to come, that's what this football club is all about with each and every training session, hopefully that will transfer to each and every game, so hopefully we haven't seen the best of Liverpool yet."
He added: "It's not rocket science. If you don't put the chances away and they get a goal back, as they did, then this crowd gets behind them.
"All credit to our lads, we kept the ball well and we moved the ball about well.
"We knew the plan, we created chances and thankfully we converted them."
Lee added: "We have said on many occasions we're not conceited about anything we've done.
"We've planned for this and we always plan to be the best that we can.
"We have said you win nothing in December, but you can certainly lose a lot. All you can do is be in a position at any given time.
"We're very, very pleased to be going into the New Year at the top and that's all you can be."