Consumer price inflation in the United Kingdom increased unexpectedly last month, official figures showed Wednesday, dashing expectations of a slowdown, dimming hopes of an early interest rate cut and prolonging a cost-of-living squeeze before an election.
Inflation, as measured by the consumer price index (CPI), rose to 4% in December, the Office for National Statistics (ONS) said, up from a more-than-two-year low of 3.9% recorded in November, as rising alcohol and tobacco prices sparked the first increase in 10 months.
The figures bucked expectations among economists and led to a jump in sterling as investors scaled back their expectations for a cut in interest rates by the Bank of England (BoE) in May. Most economists had expected the rate to edge lower to 3.8%.
The figure is double the Bank of England's official target of 2% and the highest level in the G-7.
The hotter-than-expected data is a blow to embattled Conservative Prime Minister Rishi Sunak, who is trailing behind opposition Labour leader Keir Starmer in opinion polls ahead of a general election this year.
Britain's recession-threatened economy is already buckling under a cost-of-living crisis and increasing industrial unrest over pay.
The BoE raised interest rates 14 times between December 2021 and August 2023, taking rates to a 15-year high of 5.25% after inflation surged to a 41-year high of 11.1% in late 2022 and proved slow to fall thereafter.
The surge in inflation was first stoked by supply chain issues during the coronavirus pandemic and then Russia's full-scale invasion of Ukraine, which pushed up food and energy costs.
While the rate increases have helped in the battle against inflation, the squeeze on consumer spending, primarily through higher mortgage rates, has weighed on the British economy, which is barely growing.
Inflation began to fall faster than expected in the latter months of last year, leading many economists to predict that inflation would be back at the BoE's 2% target by April or May this year, around 18 months sooner than the BoE was predicting.
Treasury chief Jeremy Hunt said after the data that inflation did not fall in a straight line.
"As we have seen in the United States, France and Germany, inflation does not fall in a straight line, but our plan is working and we should stick to it," Hunt said.
"We took difficult decisions to control borrowing and are now turning a corner."
Rachel Reeves, the Labour Party's would-be finance minister, said many families had become financially worse off during the past 14 years of Conservative-led government.
Michael Saunders, a former BoE policymaker, told BBC radio that he did not think the latest data contradicted the broader underlying decline in inflation.
"The bigger picture is that inflation is falling more sharply overall than the Bank of England had expected a few months ago," he said.
"Their thoughts will be starting to turn toward interest rates possibly coming down later this year... perhaps starting around the middle of the year," he said.
Michael Hewson, CMC Markets analyst, said the latest numbers "serve to reinforce the challenge facing the Bank of England in returning inflation to target ... with markets pushing back the timing of the first cut to the middle of the summer."
"The only debate now is not whether we see rate cuts this year, it is when we see rate cuts."
Wednesday's data comes a day after data showed U.K. unemployment steadied and wage growth retreated in the three months to the end of November, partly soothing inflation concerns.
The ONS said December's increase in inflation was driven by a rise in tobacco duty that took effect in late November.
However, there were broader upward pressures too from clothing, airfares and entertainment prices. These were only partially offset by a drop in the annual rate of inflation for food and nonalcoholic drinks to 8% from 9.2%, its lowest since April 2022.
Core inflation – which excludes volatile food, energy, alcohol and tobacco prices – was unchanged at 5.1% in December, in contrast to economists' expectations for a drop to 4.9%, and the first month since July that it has not fallen.
Services inflation increased to 6.4% in December from 6.3% in November, while inflation for goods dropped to its lowest since April 2021 at 1.9%.
The BoE looks at both core CPI and services inflation as its favored guides to underlying price pressures in the economy.
Separate inflation data from British factories showed price pressures cooled more than expected, with input costs falling 2.8% in annual terms – the biggest such drop since July.
Figures on Tuesday showed average weekly earnings excluding bonuses rose by an annual 6.6% in the three months to the end of November – the slowest increase in nearly a year.
While wages are now growing faster than inflation, overall living standards have stagnated in recent years, weighing on the public mood ahead of a national election that Sunak is likely to call in the second half of 2024.
