UK Inflation Posts Surprise Increase

Alcohol and tobacco were the biggest contributors to rising consumer prices.

What's behind the unexpected increase

UK inflation figures for December show that prices rose by 4% year-on-year. This was an increase on November's 3.9%, and an unwelcome surprise, given that economists had been predicting a drop to 3.7%.

Alcohol and tobacco are the worst categories for increases, though food and communication also saw significant rises. Core CPI remains above 5%.

Interest Rates Impact?

The increase in inflation will call into question the Bank of England's intention to lower interest rates over the course of the year. While cuts are still expected, starting in June, the pace may be slower, depending on how the situation evolves. Sterling strengthened slightly against the dollar as a result.

Red Sea Disruption

Recent Houthi attacks on shipping in the Red Sea risk pushing prices up further, since shipping companies are being forced to make lengthy detours to avoid the danger. This entails delays of many days, increased fuel costs for vessels, and disruption to supply chains. Critically, around a fifth of oil imports to Europe and the UK use this route.

Red Sea Conflict Could Push Inflation Up Again, Warns Economist
Strikes by Houthi rebels is prompting shipping companies to change their routes, adding thousands of miles to their journeys.

Not An Isolated Trend

The UK is not alone in seeing a pick-up in inflation. US CPI increased 0.3% on November to 3.4% for December, while France and Germany have also seen slight rises.

The Bank of England is still sticking to its target of 2% inflation, but the persistence of rising prices indicate how hard it can be to bring inflation back under control.

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