UK inflation overshoots forecasts in cost of living warning
Inflation overshot forecasts pencilled in by economists, sending the Bank of England a warning on their steady pace of interest rate cuts.
New data published by the Office for National Statistics (ONS) has shown consumer price index (CPI) inflation, the headline measure for price growth, hitting 3.4 per cent in the year to December.
Economists polled by Bloomberg suggested the reading would come in at 3.3 per cent.
“Inflation ticked up a little in December, driven partly by higher tobacco prices following recently-introduced excise duty increases,” Grant Fitzner, chief economist at the ONS, said.
In worrying news for UK households, food price inflation hit 4.5 per cent compared to 4.2 per cent in the previous month. The measure is closely watched by Bank of England rate-setters given the cost of groceries can weigh heavily on inflation expectations.
Services inflation, which is also closely monitored by Bank officials, meanwhile came in at 4.5 per cent, according to the official data body.
Chancellor Rachel Reeves said: “My number one focus is to cut the cost of living.
“Money off bills and into the pockets of working people is my choice. There’s more to do, but this is the year that Britain turns a corner.”
Capital Economics UK economist Paul Dales warned that the headline inflation rate could have been higher.
“Admittedly, the rise could have been bigger. It was flattered to some degree by airfares inflation rising from 0.3 per cent to ‘only’ 11 per cent – we had pencilled in a gain to 21 per cent.
“This was partly due to the fairly early timing of the ONS’s survey, the period around 9th Decemberm, which meant less of the pre-Christmas surge in airfares was captured than usual.
Shadow chancellor Mel Stride said: “Inflation is rising because of Labour’s economic mismanagement – pushing up the cost of living and punishing the most vulnerable.”
Inflation data to be digested by Bank analysts
Today’s release will be the last set of key inflation figures that Bank of England policymakers will see before they decide on whether to cut interest rates in early February.
The Bank is not expected to cut interest rates from the current 3.75 per cent level at its next meeting.
But dovish members on the monetary policy committee, including Alan Taylor, have argued that trade diversion from China to the UK would lower prices for UK consumers.
ONS figures pointing to a continued downward trend on wage growth and job cuts yesterday are also likely to provide keen rate-cutters with extra ammunition to make their case in upcoming meetings.
Most economists are only predicting one further interest rate cut this year as the Bank hopes to carefully manage the UK economy’s gradual arrival to the target 2 per cent inflation rate.
Some economists believe that the UK could end on interest rates as low as 3 per cent, though sticky pay growth and high inflation expectations could thwart plans for further cuts this year.
Andrew Bailey also urged central bank members to remain “very alert” to President Trump’s economic policymaking, with interference in the Federal Reserve’s independence and the potential for higher tariff rates to have ripple effects on growth and inflation across the UK.