UK inflation rose for the first time in five months in December, adding uncertainty to the outlook for interest rates ahead of the Bank of England’s next policy decision.
Figures from the Office for National Statistics (ONS) showed the consumer prices index increased to 3.4% in December, up from 3.2% in November. The rise was sharper than economists had expected, with prices increasing by 0.4% over the month. City forecasts had pointed to a smaller move to 3.3%.
Alcohol and tobacco, along with transport costs, accounted for the largest share of the monthly increase. Grant Fitzner, chief economist at the ONS, said inflation “ticked up a little” in December, driven in part by higher tobacco prices following recent excise duty increases. Airfares also played a role, rising more than they did a year earlier, which he attributed to the timing of return flights over the Christmas and New Year period. Food prices, particularly for bread and cereals, added further upward pressure.
These increases were partly offset by easing rent inflation and lower prices across a range of recreational and cultural goods. The annual increase in factory gate prices was unchanged, while the cost of raw materials for businesses rose more slowly, helped by lower crude oil prices.
Core inflation, which strips out energy, food, alcohol and tobacco, remained at 3.2%. Services inflation, closely watched by rate setters, edged up to 4.5% from 4.4%.
Chancellor Rachel Reeves reiterated her focus on easing living costs, citing measures such as energy bill support, freezes on rail fares and prescription charges, and increases to the minimum and living wages.
While policymakers had expected a temporary rise in December, markets now see an unlikely rate cut next month. Investors are instead pricing in a possible quarter-point cut in June, assuming inflation continues to ease in the months ahead.
Talk to us about your finances.
