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UK inflation rises to 4% in December in blow to interest rate cut hopes

inflation 230323 -- MANCHESTER, March 23, 2023 -- A shopping trolley is seen at a supermarket in Manchester, Britain, March 22, 2023. The United Kingdom s UK consumer price index CPI rose to 10.4 percent in the 12 months to February 2023 from 10.1 percent in January, the Office for National Statistics ONS said on Wednesday. Photo by /Xinhua BRITAIN-CPI-INFLATION JonxSuper PUBLICATIONxNOTxINxCHN
Food inflation also came in higher in December. (IMAGO/Jon Super, Imago)

UK inflation surprisingly rose to 4% in December according to the Office for National Statistics (ONS), complicating predictions for when the Bank of England will begin cutting interest rates.

The annual rate of price rises increased from 3.9% in November and was higher than the 3.8% that had been predicted by economists.

The increase in the annual rate was largely the result of a government increase in tobacco duty, after the government announced higher taxes in the autumn statement.

Tobacco prices saw an annual increase of 16% last month, while alcohol had a smaller rise at 9.6%.

At the other end of the scale, the annual inflation rate on food and non-alcoholic beverages saw the biggest fall in the latest period, dropping to 8% in December from 9.2% in November.

There was some relief for households as food prices eased back sharply once more, coming back down further from 45-year highs seen in 2023.

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The ONS said prices also fell at the fuel pumps, with the average price of petrol down by 8.2p a litre between November and December to stand at 142.8p. Diesel prices fell by 7.6p a litre this year to stand at 151.4p.

The figures showed that air fares rose as usual between November and December, up by 57.1%, compared with a 61.1% rise a year ago. The annual rate for air fares was 0.8% in December.

ONS chief economist Grant Fitzner said: “The rate of inflation ticked up a little in December, with rises in tobacco prices due to recently introduced duty increases.

Read more: UK house prices rise in the new year

“These were partially offset by falling food inflation, where prices still rose but at a much lower rate than this time last year.

“Meanwhile, the prices of goods leaving factories are little changed over the last few months, while the costs of raw materials remain lower than a year ago.”

The closely watched core inflation figure – which excludes volatile food, energy, alcohol and tobacco prices – came in at an annual 5.1%.

Chancellor Jeremy Hunt said: “As we have seen in the US, France and Germany, inflation does not fall in a straight line, but our plan is working and we should stick to it.

“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.”

Before the latest data was released, money markets were predicting that the Bank of England would begin lowering borrowing costs by May.

However the surprise increase might force markets to reprice their bets, with Simon French, the chief economist for stockbroker Panmure Gordon saying that cuts will start in August.

Threadneedle Street has raised interest rates in a bid to tackle inflation, holding them at a 15-year high of 5.25% in recent months.

"A rise in inflation will come as a blow for mortgage holders and prospective buyers waiting on tenterhooks for interest rate cuts to soften the blow from high mortgage rates", Alice Haine, personal finance analyst at Bestinvest, said.

Read more: Can you still make money by switching current accounts?

"Improving interest rate expectations in recent weeks has led to some forecasters predicting the first cut in the first half of 2024, with lenders slashing mortgage rates as they battle it out to retain their existing clients and attract new business," she added.

The latest inflation figure will also impact mobile and broadband customers. Most mobile and broadband providers set base their mid-contract price hikes on December's inflation figure plus 3.9%.

This means that, for many in contracts, prices will rise by 7.9% in April.

Watch: What is inflation and how does it affect you?

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