UK inflation accelerated more than expected in December on airfares and tobacco prices but it is expected to slow to the 2 percent target as the impact of utility price hikes drop out of annual comparisons.
The consumer price index posted an annual growth of 3.4 percent in December after rising 3.2 percent in November, the Office for National Statistics said Wednesday. Inflation was expected to climb to 3.3 percent.
On a monthly basis, consumer prices gained 0.4 percent, reversing a 0.2 percent fall in November. The monthly increase matched expectations.
However, excluding energy, food, alcohol and tobacco, core inflation remained unchanged at 3.2 percent in December. This was the joint-lowest rate since December 2024.
Data showed that alcohol and tobacco, restaurants and hotels, and transport led the upward contributions to the annual inflation.
“Today’s data is a stark reminder that the UK inflation waters remain choppy,” British Chambers of Commerce Research Manager Stuart Morrison said.
It is clear the path to hitting the 2 percent target will have further twists and turns, Morrison added. “Hopes of another interest rate cut at the start of February now look very unlikely,” he observed.
However, Confederation of British Industry Lead Economist Martin Sartorius said the increase in inflation will prove to be temporary and he expects the BoE to cut rates again early this year, if inflation slows as anticipated.
The economist expects price pressures to ease noticeably this year, particularly as the impact of last year’s energy and utility price hikes fades away.
Similarly, ING economist James Smith said despite the latest uptick, headline inflation is expected to reach the 2 percent target and even temporarily dip below in April.
That should unlock further rate cuts in March and June, leaving the bank rate at 3.25 percent, he noted.
Last year, the BoE had reduced its interest rates four times and signaled reductions this year. In December, the bank had lowered the rate by 25 basis points to 3.75 percent.
Separately, the ONS today reported that input price inflation softened to 0.8 percent in December from 1.1 percent in November. At the same time, output price inflation held steady at 3.4 percent.
On a monthly basis, input prices dropped 0.2 percent, in contrast to the 0.5 percent increase a month ago. Output prices remained flat after November’s 0.1 percent gain.
In a separate communiqué, the ONS said average house prices grew 2.5 percent on a yearly basis in November following an increase of 1.9 percent in October.
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