UK inflation rises unexpectedly, tempering talk of rate cuts

LONDON – UK inflation picked up unexpectedly for the first time in 10 months, a setback that’s likely to temper discussion about when the Bank of England (BOE) can reduce interest rates.

The Consumer Prices Index rose 4 per cent from a year earlier in December, up from a 3.9 per cent increase the previous month, the Office for National Statistics said on Jan 17. That was above economists’ expectations for a slight fall to 3.8 per cent. Core inflation stripping out food and energy held at 5.1 per cent.

The figures could prompt traders to rein in bets on the BOE cutting interest rates as soon as May. Softer inflation and wage data had fuelled expectations of a string of rate reductions throughout 2024 despite BOE Governor Andrew Bailey sticking by his higher-for-longer messaging. It’s also possible January’s figures show an increase as well due to higher household energy bills.

“Today’s inflation figures show it isn’t ‘job done,’” said Confederation of British Industry lead economist Alpesh Paleja, “Risks to the inflation outlook remain very much to the upside. In the near term, Ofgem’s lifting of the energy price cap in January will likely lead to a small bump in the CPI rate.”

Investors pared back bets on BOE rate cuts. Markets now only see a 60 per cent chance of a reduction in May, which was almost certain just a few days ago. A total of four quarter-point reductions are fully priced in this year, down from five at the start of 2024.

The pound erased losses immediately after the release to trade little changed on the day at US$1.2633.

“The rise in inflation today suggests that the market has got ahead of itself in expecting early rate reductions,” said Fidelity International associate director Ed Monk. “Today’s reading is a setback. The last portion of above-target inflation may prove the most difficult to shift.”

The acceleration in the UK mirrors a similar pickup in price pressures seen in the US inflation figures last week, which also dented expectations for an early rate cut slightly. Inflation there had risen to 3.4 per cent in December from 3.1 per cent.

The ONS said underlying price pressures being closely watched by the BOE also were stronger than expected in December. Services inflation – which BOE officials are watching for signs of underlying pressures on prices – accelerated to 6.4 per cent in December from 6.3 per cent in November.

There were signs that inflation was also boosted by spending in the run-up to Christmas. Clothing price inflation jumped to 6.8 per cent, while computer game consoles, sports equipment, toys and DVDs also helped to drive prices higher in the recreation and culture category. 

The figures suggest that few retailers were being forced to discount to prop up demand in the festive season, perhaps hinting at a stronger showing in December retail sales figures due out on Jan 19. The British Retail Consortium remained gloomy about the outlook, saying they’re suffering higher prices.

“Despite retailers’ efforts to deliver an affordable Christmas for everyone, high input costs increased inflation rates in furniture and household equipment,” said BRC director of insight Kris Hamer. “Retailers face a number of extra costs this year that threaten the progress made to reduce prices.”

Food inflation continued to slow, dropping to 8 per cent from 9.2 per cent in November. That was more than offset by an increase in alcohol and tobacco prices, which rose by 12.8 per cent from a year ago.

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