UK inflation shows surprise rise, denting Bank of England rate cut bets

By David Milliken and Andy Bruce

LONDON (Reuters) -Britain’s annual rate of consumer price inflation (CPI) sped up for the first time in 10 months in December, rising to 4.0% from November’s more-than-two-year low of 3.9% and denting market expectations for an early Bank of England rate cut.

A sharp rise in tobacco duty and a bigger impact from seasonal air fare increases contributed to the increase, which contrasted with expectations for a drop to 3.8% in a Reuters poll of economists.

Sterling strengthened and British government bond yields jumped after the data, while interest rate futures implied a roughly 60% chance that the BoE would start to cut rates by mid-May, down from just over 80% late on Tuesday.

The BoE raised interest rates 14 times between December 2021 and August 2023, taking rates to a 15-year high of 5.25% after inflation surged to a 41-year high of 11.1% in late 2022 and proved slow to fall thereafter.

However, inflation began to fall faster than expected in the latter months of last year, leading many economists to predict that it would be back at the BoE’s 2% target by April or May this year, around 18 months sooner than the BoE was predicting.

The rise in Britain’s inflation rate in December followed increases seen in the euro zone and United States and – unlike earlier in 2023 – British inflation is no longer significantly higher than in other large, advanced economies.

Michael Saunders, a former BoE policymaker, told BBC radio that he did not think the latest data contradicted the broader underlying decline in inflation.

“The bigger picture is that inflation is falling more sharply overall than the Bank of England had expected a few months ago,” he said. “Their thoughts will be starting to turn towards interest rates possibly coming down later this year … perhaps starting around the middle of the year.”

Britain’s economy grew just 0.2% in the 12 months to the end of November and the outlook for 2024 is weak too.

Households’ living standards have fallen over the past two years due to high inflation, contributing to the electoral challenge facing Prime Minister Rishi Sunak who has suggested he will hold a national election in the second half of the year.


Britain’s Office for National Statistics said December’s increase in inflation was driven by a rise in tobacco duty that took effect in late November, pushing up tobacco prices by the most since 1992 and adding nearly 0.1 percentage points to CPI.

Air travel added even more to the CPI rate. Although flights showed a similar seasonal increase in cost in December 2023 as a year before, earlier in 2023 the ONS increased air fares’ weighting in the inflation basket, boosting their impact on overall inflation.

There were upward pressures too from clothing and entertainment prices. These were only partially offset by a drop in the annual rate of inflation for food and non-alcoholic drinks to 8.0% from 9.2%, its lowest since April 2022.

Core inflation – which excludes volatile food, energy, alcohol and tobacco prices – was unchanged 5.1% in December, in contrast to economists’ expectations for a drop to 4.9%, and the first month since July that it has not fallen.

Services inflation increased to 6.4% in December from 6.3% in November, while inflation for goods dropped to its lowest since April 2021 at 1.9%.

Separate inflation data from British factories showed price pressures cooled more than expected, with input costs falling 2.8% in annual terms – the biggest such drop since July.

The BoE looks at both core CPI and services inflation as its favoured guides to underlying price pressures in the economy, as the latter in particular is boosted by rising wage costs.

Figures on Tuesday showed average weekly earnings excluding bonuses rose by an annual 6.6% in the three months to the end of November – the slowest increase in nearly a year but roughly double the pace the BoE views as consistent with getting inflation back sustainably to 2%.

While wages are now growing faster than inflation, overall living standards have stagnated in recent years.

Finance minister Jeremy Hunt said after the data that inflation did not fall in a straight line.

“We took difficult decisions to control borrowing and are now turning a corner,” he said.

Rachel Reeves, the opposition Labour Party’s would-be finance minister, said many families had become financially worse off during the past 14 years of Conservative-led government.

(Additional reporting by William Schomberg, graphic by Pasit Kongkunakornkul; editing by Sarah Young and Christina Fincher)