Tobacco duty causes surprise boost to UK inflation in December

A shopping trolley is pushed around a supermarket in London, Britain May 19, 2015. REUTERS/Stefan Wermuth/File photo

LONDON  -Britain’s annual rate of consumer price inflation rose for the first time in 10 months in December, increasing to 4 percent from a more-than-two-year low 3.9 percent in November, official figures unexpectedly showed on Wednesday.

A rise in tobacco duty lay behind the increase, the ONS said.

A Reuters poll of economists had pointed to a fall in inflation to 3.8 percent.

The data, which follows bigger-than-expected falls in inflation in recent months, potentially adding to concerns at the Bank of England, which raised interest rates to a 15-year high of 5.25 percent in August.

The rise in Britain’s inflation rate followed increases seen in the euro zone and United States in December.

READ: Euro zone consumers slash inflation expectations – ECB survey

Sterling rose against the U.S. dollar after the decision, which may dampen financial markets’ conviction that the BoE will start cutting interest rates in May this year.

READ:US producer prices unexpectedly fall; goods deflation seen persisting

The central bank forecast in November that it would take until late 2025 to return inflation to its 2 percent target, but many economists now think this could happen as soon as April or May this year due partly to a slide in wholesale gas prices.

Surging gas prices following Russia’s invasion of Ukraine pushed British inflation to a 41-year high of 11.1 percent in October 2022, adding significantly to existing inflation pressures from supply chain difficulties following the COVID-19 pandemic.

Wednesday’s figures showed that core inflation – which excludes volatile food, energy, alcohol and tobacco prices – was 5.1 percent in December, the same rate as November.

Services inflation increased to 6.4 percent in December from 6.3 percent in November.

READ:UK inflation falls far more than expected, lowest since Sept 2021

The BoE looks at both core CPI and services inflation as a better guide to underlying price pressures in the economy, especially those caused by rapid wage growth.

Figures on Tuesday showed average weekly earnings excluding bonuses rose by an annual 6.6 percent in the three months to the end of November – the slowest increase in nearly a year but roughly double the pace the BoE views as consistent with getting inflation back sustainably to 2 percent.