UK inflation rate surprises with rise to 4%, led by alcohol and tobacco

LONDON — U.K. inflation unexpectedly nudged upwards to 4% year-on-year in December, fueled by a rise in alcohol and tobacco prices.

This was the first month in which the annual consumer price index has risen since February 2023.

Economists polled by Reuters had expected a modest decline in the annual headline CPI to 3.8%, after November’s sharper-than-expected fall to 3.9%.

Month-on-month, the headline CPI rose by 0.4%, above a consensus forecast of 0.2% and up from -0.2% in November.

“The largest upward contribution to the monthly change in both CPIH and CPI annual rates came from alcohol and tobacco while the largest downward contribution came from food and non-alcoholic beverages,” the Office for National Statistics said.

The closely watched core CPI figure — which excludes volatile food, energy, alcohol and tobacco prices — came in at an annual 5.1%, above a 4.9% Reuters forecast and unchanged from November.

The largest upward contribution to the core figure came from travel and transport services, the ONS said.

“As we have seen in the U.S., France and Germany, inflation does not fall in a straight line, but our plan is working and we should stick to it,” British Finance Minister Jeremy Hunt said in a statement.

“We took difficult decisions to control borrowing and are now turning a corner, so we need to stay the course we have set out, including boosting growth with more competitive tax levels.”

The Bank of England will hold its next monetary policy meeting on Feb. 1, after hiking interest rates rapidly over the past two years in a bid to tame runaway inflation.

A fresh round of jobs data on Monday also highlighted the difficult path ahead for the British central bank, as it decides when, and how sharply, to cut interest rates in 2024. Markets are currently pricing more than 100 basis points of cuts to the benchmark rate across the year.

The number of vacancies posted declined by 49,000 over the final quarter of the year, while the unemployment rate remained largely flat at 4.2%.

Pay growth, a key data point for the Bank, slowed significantly in the three months to the end of November. As inflation is falling faster than that rate, average pay is still growing in real terms.