In a surprise to many, the UK’s inflation rate rose for the first time in five months, reaching 3.4% in the year to December. However, analysts believe this uptick is not the start of a sustained upward trend, as it can be attributed to one-off factors such as higher tobacco prices and airfares over the Christmas period.
The inflation figure, which was higher than the 3.3% forecast, precedes the Bank of England’s first meeting of the year to decide on interest rates. The central bank ended 2022 by trimming the cost of borrowing to 3.75%.
Michael Saunders, a former rate-setter at the Bank, said the increase “is not the start of a new upward trend, it reflects a variety of fairly temporary erratic factors”. He expects the Bank to announce “gradual” interest rate cuts this year, as inflation and pay growth remain too high for comfort.
The data revealed that some elements of inflation, such as rent and housing services, eased in December. However, transport prices rose by 4% in the 12 months to December, mainly due to the timing of airfares around the Christmas and New Year period.
Food and non-alcoholic drink prices also saw a 4.5% rise, driven by increases in the cost of bread, cereals, and vegetables. Balwinder Dhoot, director of growth and sustainability at the Food and Drink Federation, said rising costs meant households were “feeling the squeeze, resulting in a subdued Christmas for the sector”.
Compared to European neighbours, the UK’s December inflation rate was higher, with Germany recording 2% and France 0.7%. However, Sanjay Raja, chief UK economist at Deutsche Bank, predicted that UK inflation will “take a big step down in January” and that the Bank of England’s 2% target will be “in sight” by spring.
“In fact, we think the UK will see the biggest fall in headline inflation of any G7 country this year,” he said.
