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Ammon News - UK inflation unexpectedly rose to 4.0% in December, complicating predictions for the Bank of England to begin cutting interest rates.

The Office for National Statistics said annual inflation as measured by the consumer prices index rose from the 3.9% reading in November, halting a period of recent declines. City economists had forecast a modest fall to 3.8%.

The increase in the annual rate was largely the result of a government increase in tobacco duty, after the government announced higher taxes in the autumn statement. Tobacco prices rose by 16% on the year, as the cost of buying alcohol and tobacco added the largest contribution to inflation since 2006.

Grant Fitzner, the ONS chief economist, said tobacco price rises “were partially offset by falling food inflation, where prices still rose but at a much lower rate than this time last year. Meanwhile, the prices of goods leaving factories are little changed over the last few months, while the costs of raw materials remain lower than a year ago.”

Core inflation, which excludes volatile items including energy, food, alcohol and tobacco, was unexpectedly unchanged at 5.1%, in a development that will be closely watched by the Bank before its next decision on interest rates on 1 February. Services inflation increased slightly from 6.1% to 6.2%.

Motor fuel prices fell by 10.8% in the year to December, compared with a decline of 10.6% in the year to November, after a fall of about 8p per litre for petrol and diesel on the month.

Financial markets have been expecting the Bank to slash interest rates this year in response to falling inflation and lacklustre economic growth, having driven up borrowing costs to the highest level since the 2008 financial crisis.

Nonetheless the development will enable Rishi Sunak to declare victory on his top economic priority for 2023, after pledging last January to halve the rate by the end of the year at a time when it was above 10%. Most economists had expected it to drop by this much anyway, but inflation has proven more persistent than first anticipated.

The Guardian