Shock rise in inflation cools hopes of early interest rate cut
Economists said inflation may rise again in January, but is set to fall sharply in the coming months.
Your support helps us to tell the story
From reproductive rights to climate change to Big Tech, The Independent is on the ground when the story is developing. Whether it's investigating the financials of Elon Musk's pro-Trump PAC or producing our latest documentary, 'The A Word', which shines a light on the American women fighting for reproductive rights, we know how important it is to parse out the facts from the messaging.
At such a critical moment in US history, we need reporters on the ground. Your donation allows us to keep sending journalists to speak to both sides of the story.
The Independent is trusted by Americans across the entire political spectrum. And unlike many other quality news outlets, we choose not to lock Americans out of our reporting and analysis with paywalls. We believe quality journalism should be available to everyone, paid for by those who can afford it.
Your support makes all the difference.Inflation has increased unexpectedly for the first time in nearly a year after alcohol and tobacco price hikes, dampening hopes of an early interest rate cut by the Bank of England.
Figures from the Office for National Statistics (ONS) showed the rate of Consumer Prices Index (CPI) inflation rose to 4% in December, up from 3.9% in November – marking the first increase since February last year.
The shock rise was largely driven by last November’s tax hike on tobacco, as well as higher alcohol prices and air fares.
Most economists had expected inflation to edge lower to 3.8%.
The FTSE 100 Index fell 1.7% to 7,427.4 as financial markets trimmed their rate cut expectations while the pound jumped on expectations that rates will now stay at 5.25% for longer.
Sterling lifted 0.4% to 1.27 US dollars and was also 0.4% higher at 1.17 euros.
Economists said it was still likely the Bank will look to trim rates this year.
They cautioned that the path of inflation may not be smooth, with another possible increase in January and concerns over the impact of the Red Sea shipping attacks on prices, but are forecasting CPI to drop sharply over the coming months.
The increase in CPI came just hours after Rishi Sunak said the Government had met its pledge to halve inflation and claimed “it has continued to fall”.
Chancellor Jeremy Hunt insisted that the Government’s “plan is working”.
He said: “As we have seen in the US, France and Germany, inflation does not fall in a straight line, but our plan is working and we should stick to it.”
He said the inflation risk posed by the Red Sea crisis was one of the reasons for the UK-US military strikes against Houthi targets, as fears grow that it could push up the cost of oil, gas and goods.
Mr Hunt told broadcasters: “It’s precisely because we are concerned about what’s happening in the Red Sea that the UK has taken action with the United States and our other allies to secure freedom of navigation. We are obviously watching the situation very carefully.”
The surprise rise in UK inflation comes after alcohol and tobacco inflation hit a high of more than 31 years last month, at 12.8%.
Tobacco prices surged by 16% year on year in December while alcohol inflation hit 9.6% as prices continued to rise after a duty rise on booze in August last year.
Air fares also rose as usual between November and December, up by 57.1%, compared with a 61.1% rise a year ago.
The annual rate for air fares was 0.8% in December.
There was some relief for households as food inflation eased back sharply to 8% last month, down from 9.2% in November and the lowest rate since April 2022.
The latest data also showed the CPI measure of inflation including housing costs (CPIH) remained at 4.2% in November while the Retail Prices Index (RPI) fell back to 5.2% from 5.3%.
Martin Beck, chief economic adviser to the EY Item Club, said while inflation is double the Bank’s 2% target, it is still lower than policymakers had forecast.
He cautioned “there’s a good chance that inflation may rise again this month” but said hopes of a significant cut to energy bills in April and slowing UK wage growth should see inflation fall to 2% by May.
“This should give the green light for the Monetary Policy Committee to start cutting interest rates in the same month, with the EY Item Club expecting bank rate to fall from the current 5.25% to 4% by the end of this year,” he added.