The UK experienced a surprising increase in inflation in December, reaching a rate of 4%. This marked the first rise in 10 months and raised concerns for the Bank of England, which had previously raised interest rates to a 15-year high of 5.25% in August.
Economists surveyed by Reuters had predicted a reading of 3.8%, making the actual figure of 4% higher than anticipated. This unexpected increase in inflation comes after several months of larger-than-expected drops, adding to the surprise.
The Bank of England had previously forecasted that it would take until late 2025 to bring inflation back down to its 2% target. However, many economists now believe that this could occur as early as April or May, thanks in part to a decrease in wholesale gas prices.
In October 2022, British inflation reached its highest level in 41 years at 11.1% due to a surge in gas prices following Russia’s invasion of Ukraine. This added significant pressure to the existing inflationary challenges caused by supply chain difficulties stemming from the COVID-19 pandemic.
Additional data from the release showed that core inflation, which excludes volatile prices of food, energy, alcohol, and tobacco, remained at a rate of 5.1% in December, unchanged from November. On the other hand, services inflation slightly increased from 6.3% in November to 6.4% in December.
The Bank of England views both core CPI and services inflation as important indicators of the underlying price pressures in the economy, particularly those influenced by rapid wage growth. Recent figures revealed that average weekly earnings, excluding bonuses, rose by an annual 6.6% in the three months ending in November. While this represents the slowest increase in almost a year, it is roughly double the pace that the Bank of England deems consistent with sustainably bringing inflation back down to 2%.
Useful links:
1. Bank of England inflation target
2. Bank of England interest rate hike in August
