Inflation in the UK rose marginally last month, driven by rises in tobacco and alcohol prices.
The Consumer Prices Index (CPI) increased to 4.0% in December 2023, up from 3.9% in November, marking the first time the rate has increased since February last year. Economists had been expecting a fall to 3.7%, with the surprise uptick casting doubt on the prospect of a cut in interest rates in the near future.
The Office for National Statistics (ONS) noted that the largest upward contribution to the monthly change came from alcohol and tobacco, while the largest downward contribution came from food and non-alcoholic beverages.
Tobacco prices rose by 4.1% between November and December compared with a 0.3% rise between the same two months last year, leading to an annual increase of 16.0%. The rise was largely the result of the increase in tobacco duty announced by the government in its autumn statement.
Whilst alcohol made a smaller contribution to the overall rise, prices in the sector still increased 9.6% year-on-year.
Meanwhile, food inflation slowed for the ninth month in a row, from 9.2% to 8.0%. The rate is now the lowest since April 2022 and follows a 45-year peak in March 2023.
The easing in food and non-alcoholic beverages was driven by milk, cheese and eggs, where prices rose by 0.5% on the month, compared with a rise of 4.1% a year ago. The annual rate for milk, cheese and eggs was 3.3%, the lowest observed since October 2021.
Other smaller but still notable downward contributions came from meat, fish, and sugar and jam. The only partially offsetting upward effect came from bread and cereals, where cakes, and chocolate biscuits provided upward contributions.
Inflation has also fallen quicker than the Bank had predicted, but it still remains nearly double its 2% target. Ruth Gregory, deputy chief UK economist at Capital Economics, said she expected inflation to fall below the 2% target in April, which would leave policymakers “in a position to cut interest rates by June”.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, noted that falling energy prices would continue to drive down overall inflation, which he said should give the Bank “confidence” to cut its rate for the first time in May or June.
However, Sarah Coles, head of personal finance at Hargreaves Lansdown, said while the trend is now likely to be downward on interest rates, she warned that more uncertainty was on the way, with conflict in the Red Sea raising the risk of supply shortages, which could feed into higher prices.
Kris Hamer, Director of Insight of the British Retail Consortium (BRC), added: “Retailers face a number of extra costs this year that threaten the progress made to reduce prices. New EU border checks this month, disruption in the Red Sea, a hike to business rates in April, and the potential of a new grocer surtax in Scotland are all challenges that retailers need to navigate in 2024.
“With an election in the next 12 months, it is time political parties understand the value of retail to the wider economy and set out a clear and cohesive plan for retail in their manifestos. Allowing retail to thrive will create jobs, bring down prices for households, and support communities up and down the country.”
NAM Implications:
- Notice to all breath-holders.
- Still in the pipeline:
- New EU border checks this month
- Disruption in the Red Sea
- A hike to business rates in April
- The potential of a new grocer surtax in Scotland
- Now place your bets re a cut in interest rates…
