Key Details
The United Kingdom's inflation rate increased to 3.4% in December, surpassing the 3.3% forecast by economists. This followed a sharp cooling to 3.2% in November.
Core inflation, which excludes energy, food, alcohol, and tobacco, remained at 3.2% in December, consistent with November's figures, according to the Office for National Statistics (ONS).
Contributing Factors
ONS Chief Economist Grant Fitzner stated that the December increase was partly driven by higher tobacco prices, following recently introduced excise duty increases. Rising airfares also contributed, likely due to the timing of return flights over the Christmas and New Year period. Increased food costs, particularly for bread and cereals, were identified as an upward driver.
These increases were partially offset by a fall in rents inflation and lower prices for a range of recreational and cultural purchases, as noted by the ONS.
Market and Policy Implications
Pound sterling remained largely stable against the dollar at $1.3231 following the data release.
The inflation figures, along with recent employment data showing further cooling in the labor market, raise questions regarding the Bank of England's (BOE) anticipated interest rate cut in February.
Scott Gardner, an investment strategist at J.P. Morgan Personal Investing, commented that a small monthly price increase is unlikely to concern BOE policymakers in the short term, especially if pay growth continues its downward trajectory. He suggested that if pay growth continues to fall and is reflected in inflation data, it could pressure the BOE to cut interest rates faster than expected, potentially altering market pricing for the year.
Matthew Ryan, Head of Market Strategy at Ebury, expressed an expectation for the BOE to maintain current rates for at least the next couple of meetings. He noted that arguments from committee members regarding upside risks to UK inflation are losing momentum amidst a deteriorating employment picture and moderating wage pressures.