U.K. Inflation Unexpectedly Rebounded in December, Raising Questions for Bank of England — Update
U.K. consumer prices accelerated unexpectedly in December, driven by new taxes on tobacco products, potentially pushing out calls for interest-rate cuts at the Bank of England.
The consumer price index–which measures a wide basket of goods and services prices–rose 4.0% on year in the final month of 2023, from a 3.9% increase in November, data from the Office for National Statistics showed Wednesday.
Economists polled by The Wall Street Journal expected inflation to ease to 3.8%.
Core inflation, which strips out the volatile changes in energy, food and tobacco prices, remained higher than the headline rate, at 5.1% on year in December, the same as in November and was higher than consensus expectations of 4.9%.
On a monthly basis, prices rose 0.4% from November to December, above expectations, with the largest upward contribution to the monthly change from tobacco, after Treasury chief Jeremy Hunt announced higher taxes in his most recent Autumn budget statement, the ONS said. Tobacco prices rose 4.1% between November and December, or 16% on year, the data said.
However, inflation in food and nonalcoholic beverages–which has been a consistent pain for U.K. consumers, slowed, coming in at 8.0% on year from 9.2% in November. Transport costs were down 1.1% on year, driven by air fares and as a result of motor-fuel prices falling 10.8% in the year to December.
Meanwhile, prices for electricity, gas and fuels were 21.5% lower in December than the same point in 2022, a stark reversal from how prices rocketed in the period after Russia’s invasion of Ukraine.
Still, the rebound in overall inflation puts a spanner in the works for BOE policymakers expecting a steady decline in inflation to its 2% target.
It could delay expectations for a first rate cut, leading to further pressures on the U.K. economy, given that higher rates would squeeze consumer spending for longer. Money markets are pricing in a 25 basis-point cut in May, according to Refinitiv data.
But despite the surprise pickup in tobacco inflation–and concern that services inflation popped back up to 6.4% from 6.3%–favorable base effects and a fall in utility prices will likely drag inflation below the 2% target by April, according to Ruth Gregory, Capital Economics’ deputy chief U.K. economist.
The BOE held interest rates at its last meeting of 2023, keeping its key bank rate at 5.25%–its highest in 15 years–after ramping up borrowing costs from 0.1% in November 2021. The BOE’s next meeting is Feb. 1.
Write to Ed Frankl at [email protected]
