Market News

UK inflation rose for the first time in five months in December, complicating the outlook for interest rates ahead of the Bank of England’s next policy decision.

Data published by the Office for National Statistics showed the consumer prices index increased to 3.4% in December from 3.2% in November, a sharper rise than economists had expected. Prices increased by 0.4% over the month.

Alcohol and tobacco, alongside transport, made the largest upward contributions to the monthly increase in inflation. City forecasts had pointed to a more modest rise to 3.3%.

Grant Fitzner, chief economist at the ONS, said: "Inflation ticked up a little in December, driven partly by higher tobacco prices, following recently introduced excise duty increases.

“Airfares also contributed to the increase with prices rising more than a year ago, likely because of the timing of return flights over the Christmas and New Year period. Rising food costs, particularly for bread and cereals, were also an upward driver.

“These were partially offset by a fall in rents inflation and lower prices for a range of recreational and cultural purchases."

“The annual increase in the prices for goods leaving factories was unchanged this month while the increase in the cost of raw materials for business slowed, driven by lower crude oil prices.”

Core inflation, which excludes energy, food, alcohol and tobacco, held at 3.2% in December. Services inflation, a key measure of underlying price pressures for rate setters, was 4.5% compared with 4.4% in November.

Chancellor Rachel Reeves said: “My number one focus is to cut the cost of living. At the budget I announced £150 off energy bills, a freeze to rail fares for the first time in 30 years, a freeze to prescription charges for the second year running, and an increase to the national minimum and living wage. Money off bills and into the pockets of working people is my choice. There’s more to do, but this is the year that Britain turns a corner.”

Bank of England policymakers had anticipated a temporary rise in inflation in December, partly reflecting higher airfares. They have argued that falling energy bills and subdued economic growth should ease price pressures during the first half of the year.

Market pricing suggests traders have largely ruled out an interest rate cut at the Monetary Policy Committee’s meeting next month. However, investors are betting that easing inflation will allow officials to lower borrowing costs by a further quarter point in June.