The United Kingdom witnessed a rise in inflation to 4% year-on-year in December, driven by an increase in alcohol and tobacco prices. This marks the first monthly increase in the annual Consumer Price Index (CPI) since February 2023, defying economists’ expectations of a decline to 3.8%.
According to data from the Office for National Statistics, the headline CPI rose by 0.4% month-on-month, surpassing the consensus forecast of 0.2% and rebounding from November’s -0.2%. The largest contributor to the monthly change was attributed to alcohol and tobacco, while food and non-alcoholic beverages made the most substantial downward contribution.
The closely watched core CPI, excluding volatile elements like food, energy, alcohol, and tobacco, registered an annual 5.1%, exceeding the Reuters forecast of 4.9% and remaining unchanged from November. The primary upward influence on the core figure was identified as travel and transport services.
Despite the unexpected rise in inflation, British Finance Minister Jeremy Hunt emphasized the effectiveness of the government’s plan, stating that inflation does not fall in a straight line. The Bank of England, which has been actively raising interest rates to combat inflation, is scheduled for its next monetary policy meeting on February 1.
Economists, such as Suren Thiru from ICAEW, view the unexpected inflation rise as a reminder that the battle against soaring inflation continues. Thiru anticipates a decline in inflation in the coming months, aided by lower energy bills and reduced food inflation.
PwC Economist Jake Finney expressed optimism that headline inflation is still on track to return to the Bank of England’s 2% target by April. He suggested that the central bank might respond to easing inflation pressures by lowering projections in the upcoming February Monetary Policy Report, potentially paving the way for rate cuts later in the year.
However, challenges lie ahead for the Bank of England, as recent jobs data indicate a decline in posted vacancies and slowing pay growth. The central bank faces the delicate task of deciding when and how sharply to cut interest rates in 2024, with markets currently pricing in more than 100 basis points of cuts across the year.