2024.01.1710:54:00UTC+00UK Inflation Picks Up On Tobacco Duty Hike

UK consumer price inflation picked up for the first time in ten months in December due to a hike in the tobacco duty, official data showed Wednesday.

The consumer price index, or CPI, rose 4.0 percent on a yearly basis, slightly faster than November's 3.9 percent increase, the Office for National Statistics reported.

The rate was forecast to edge down to 3.8 percent.

The inflation rate accelerated for the first time since February 2023. That said, the annual rate in December 2023 was the second lowest since September 2021.

Month-on-month, the CPI gained 0.4 percent, offsetting the 0.2 percent decrease a month ago. Prices were expected to climb 0.2 percent.

Core inflation that excludes energy, food, alcohol and tobacco held steady at 5.1 percent in December. This was above economists' forecast of 4.9 percent.

Alcohol and tobacco prices provided the largest upward contribution to inflation.

The cost of alcohol and tobacco surged 12.8 percent in December as a result of the increase in tobacco duty after the government announced higher taxes in their autumn statement.

Further, services inflation rose to 6.4 percent from 6.3 percent.

Despite an unexpected rise in inflation, Capital Economics economist Ruth Gregory still expects favorable base effects and a fall in utility prices to drag CPI inflation below the 2 percent target by April.

This would possibly leave the Bank of England in a position to cut interest rates in June, the economist added.

Markets are pricing a rate cut in May, which seems to be a little premature, ING economist James Smith said.

Services inflation is likely to remain stubborn in the near-term, and also much depends on the size of any fiscal stimulus at the March budget.

Smith expects a rate cut in August with 100 basis points of easing to follow this year.

Separate data from the ONS showed that output prices rose for the first time in three months in December and input price inflation remained negative for the seventh straight month. Output prices gained 0.1 percent annually, reversing a 0.1 percent fall in November. On a monthly basis, output prices slid 0.6 percent after staying flat a month ago.

At the same time, the annual fall in input prices deepened to 2.8 percent in December from 2.7 percent in November.

On a monthly basis, input prices fell 1.2 percent, which was the largest fall since June 2023. This follows a revised 0.4 percent fall in November.

Separately, the ONS said average house prices continued to fall in November. House prices were down 2.1 percent following a 1.3 percent drop in October.