Shoppers browse fruit and vegetables on sale at an indoor market in Sheffield, England. The OECD recently predicted that the UK will experience the highest inflation this year among developed countries.
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Britain’s inflation rate rose to 3.4% in December, higher than the 3.3% expected by economists polled by Reuters.
Inflation fell sharply to 3.2% in the 12-month period ending in November, data that prompted the Bank of England to cut interest rates at its final meeting of the year last month.
Core inflation, which excludes energy, food, alcohol and tobacco, stood at 3.2% in December, unchanged from November, according to the latest figures from the Office for National Statistics.
“Inflation rose slightly in December, due in part to higher tobacco prices following the recently introduced excise duty hike,” ONS chief economist Grant Pfitzner said on Wednesday’s X program.
“Airfares also contributed to the increase, with prices increasing over a year ago, likely due to the timing of return flights over the Christmas and New Year period. Rising food prices, particularly bread and cereals, also contributed to the increase,” he added.
These price increases were partially offset by lower rent inflation and lower prices for a range of recreational and cultural purchases, the ONS noted.
As a result of this statistics, the British pound remained almost unchanged against the dollar at $1.3231.
Finance Minister Rachel Reeves told CNBC on Wednesday that the Bank of England expected inflation to rise slightly towards the central bank’s 2% target before cooling in the spring and summer.
“That continues to be their expectation and it continues to be my expectation, and thanks to the steps I took in last year’s budget, it will happen,” he told CNBC at the World Economic Forum in Davos, Switzerland.
But the figures, released on the heels of Monday’s jobs report showing a further cooling in the labor market, still cast doubts on whether the BoE will go ahead with its expected February rate cut or potentially delay it a little longer.
“Small monthly price increases are unlikely to concern Bank of England policymakers in the short term, especially as wage growth continues to trend down,” Scott Gardner, investment strategist at JPMorgan Personal Investing, said in emailed comments on Wednesday.
“If wage growth continues to fall, and this is reflected in inflation data, there could be pressure on the Bank of England to cut interest rates sooner than expected. Markets are currently pricing in one or two rate cuts this year, but that could change once 2026 inflation data starts coming in,” he said.
Matthew Ryan, head of market strategy at Everly, said he expects the BOE to remain on hold for at least the next few meetings.
“Harks on the committee have long emphasized the upside risks to UK inflation, but these arguments are losing momentum as the employment situation worsens and wage pressures ease,” he said on Tuesday.
