UK inflation unexpectedly rose for the first time in 10 months, prompting traders to trim their expectations of a rate cut from the Bank of England this year.
The Office for National Statistics said on Wednesday that the consumer price index rose 4% from a year earlier in December, compared with a rise of 3.9% in the previous month. Economists had expected a slight decline to 3.8%. Services inflation also rose, with the core index excluding food and energy settling at 5.1. %.
These figures are a global shift away from low interest rates. Inflation in the United States last week was also higher than expected, and the head of the European Central Bank said on Wednesday that market expectations did not help policymakers in their fight against inflation. One expert said today’s high inflation suggested that the market had ahead of itself in expecting early rate cuts, that today’s reading was a setback and that the final part of above-target inflation was the most difficult to shift.
In Britain, a sudden increase in inflation has dampened optimism stemming from a series of reports that price pressures have slowed. The economy experienced a recession in the second half of 2023, slipped to the brink of recession, and wage growth slowed in a sign that the hot labor market is starting to slow. The Governor of the Bank of England has stuck to his higher long-term message on interest rates, warning that January CPI figures could show an increase due to higher household energy bills.
Bonds fell and sterling rose as traders trimmed their expectations of monetary easing strongly this year. They are betting on a four-point reduction and see a 50% chance of getting a fifth point. Six cuts were seen for granted last month. The yield on the two-year bond rose as much as 15 basis points to 4.32%. Sterling was trading up 0.2% at $1.2667.
UK inflation and festive retail sales
There were signs that inflation in the UK had also been boosted by spending in the run-up to Christmas. Clothing price inflation jumped to 6.8%, while computer game consoles, sports equipment, games and DVDs also helped raise prices in the entertainment and culture category.
The figures suggest that a small number of retailers had to discount to support demand in the holiday season, perhaps pointing to a stronger supply in December retail sales figures due on Friday. The British Retail Consortium remained pessimistic about the outlook, saying they were suffering from higher prices.
“Despite the efforts of retailers to provide affordable Christmas for all, rising input costs have led to increased inflation rates in furniture and household equipment,” said one expert. “Retailers face a number of additional costs this year that threaten progress to lower prices.”
Food price inflation continued to slow, falling to 8% from 9.2% in November. This was offset by an increase in alcohol and tobacco prices, which rose 12.8% from a year ago.
The Office for National Statistics said the sharp increase in alcohol and tobacco prices was largely due to tobacco tax increases in the fall statement. Tobacco prices rose 4.1% between November and December, compared to a 0.3% rise between the same two months last year.
The annual CPI inflation rate slowed during December 2023, as continued contributions to this change showed that inflation is not falling directly. Inflation remains below the central bank’s forecast for November, allowing the government to fulfill its pledge to halve rate increases last year. The Chancellor of the Exchequer noted the success of the plan and the need to remain committed to it, with a focus on promoting growth with competitive tax levels.
UK inflation: hopes of easing to 2%
Forecasters predicted that UK inflation could return to the Bank of England’s target of 2% by April when another sharp drop in household energy bills is expected. That would be much faster than the Bank of England predicted last month when the central bank only expected to return to the target by the end of 2025.
One UK economist said: “Despite the rise in December, inflation is expected to continue to decline this year.” “The expected overall improvement in inflation expectations, coupled with a slowdown in the domestic economy, is likely to put the Bank of England in a position to start cutting interest rates from the second half of the year.”
Wednesday’s data covers a series of reports showing easing inflationary pressures. The economy shrank more than expected in the second quarter and in October and November, putting the UK on the brink of recession.
In the labor market, job vacancies began to decline, and wages rose more slowly than economists expected, leading to another upward force on prices. These reports have led traders to bet on the first rate cut in May, followed by four more quarter-percentage point cuts by the end of the year.
“Inflation could give us a bit of a bumpy journey over the next couple of months,” said the policy director at the Institute of Directors. “Next month’s figure should include a 5% increase, so it can also rise. However, inflation in the economy is still moving broadly in the right direction.
Inflationary pressures continued to ease, with production and output input prices falling in December at a faster pace than economists had expected. The cost of fuel and raw materials is down 2.8 percent from a year ago, reflecting lower chemical and crude oil prices.
In a warning about continued inflationary pressures, prices of service producers rose 3.6% in the year to the fourth quarter, compared to 3.5% in the third quarter.
