UK Inflation Registers First Increase in Nearly a Year

In December, UK inflation experienced its first acceleration since February of the previous year, according to official data released on Wednesday.

The Office for National Statistics reported that consumer prices increased by 4% compared to the same month a year ago, up from the 3.9% rate recorded in November. Analysts surveyed by Reuters had anticipated a slowdown to 3.8%.

The rise in tobacco prices due to recent duty hikes was partially offset by a decline in food inflation. Grant Fitzner, Chief Economist at the ONS, noted that while food prices continued to rise, the rate was much lower than the previous year. He added, “The prices of goods leaving factories are little changed over the last few months, while the costs of raw materials remain lower than a year ago.”

Core inflation, which excludes volatile food and energy prices, remained steady at 5.1%, while services inflation increased from 6.3% to 6.4%.

The UK’s inflation trend aligns with similar slight increases in headline inflation observed in the United States and Europe. This has led many economists to argue against imminent interest rate cuts by the US Federal Reserve and the European Central Bank, both targeting a headline inflation rate of 2%.

Some economists, however, believe that overall inflation is still losing momentum. Potential risks include recent attacks on commercial vessels in the Red Sea, disrupting supply chains and potentially elevating prices of manufactured goods. Additionally, energy prices could surge if the conflict in the Middle East escalates further.

Despite the uptick in inflation, several prominent UK economists downplayed its impact, suggesting that inflation might return to the Bank of England’s 2% target by spring, aided by recent declines in energy prices.

“Inflation in the economy is still broadly moving in the right direction,” remarked Roger Barker, Director of Policy at the Institute of Directors. Yael Selfin, Chief Economist at KPMG, added, “The expected overall improvement in the outlook for inflation, coupled with the slowdown in the domestic economy, will likely put the Bank of England in a position to begin cutting interest rates from the second half of the year, potentially lowering rates by (1 percentage point) in 2024.”

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