British inflation unexpectedly climbed in December, according to figures released Wednesday, shattering expectations of a decrease, depressing chances for an early interest rate cut, and prolonging a cost-of-living squeeze ahead of an election.
The Consumer Prices Index rose marginally to 4% last month, driven by increased alcohol and tobacco prices, the first increase since February, according to the Office for National Statistics.
That is double the Bank of England’s declared aim of 2% and the highest level in the Group of Seven developed countries.
The hotter-than-expected statistics is a setback for embattled Conservative Prime Minister Rishi Sunak, who is lagging opposition Labour leader Keir Starmer in opinion polls ahead of a general election this year.
Britain’s recession-hit economy is already struggling with a cost-of-living issue and rising industrial unrest over pay.
The BoE raised interest rates to a 15-year high in an attempt to cool inflation, but this has exacerbated the strain because commercial lenders pass on borrowing costs to firms and consumers.
Rate cut debate
“Today’s UK inflation numbers serve to reinforce the challenge facing the Bank of England in returning inflation to target… with markets pushing back the timing of the first cut to the middle of the summer,” said CMC Markets analyst Michael Hewson.
“The only debate now is not whether we see rate cuts this year, it is when we see rate cuts.”
Sunak had in October achieved his long-held goal of CPI falling below five percent.
Most analysts had forecast a December slowdown to 3.8 percent, after the rate touched a two-year low of 3.9 percent in November.
“As we have seen in the United States, France and Germany, inflation does not fall in a straight line, but our plan is working and we should stick to it,” said finance minister Jeremy Hunt in response to the data.
Wednesday’s data comes one day after news that UK unemployment steadied and wages growth retreated in the three months to the end of November, partly soothing inflation concerns.
Red Sea attacks
Analysts estimate that inflation will drop this year, but shipping prices will rise as a result of continued attacks on global commerce routes through the Red Sea.
Markets are waiting to see when major central banks, including the US Federal Reserve, the European Central Bank, and the Bank of England, will begin to decrease interest rates as inflation falls.
“Despite a December rise, inflation is expected to continue falling this year,” added KPMG UK chief economist Yael Selfin, citing an expected decline in domestic energy bills.
“Nevertheless, disruptions in the Red Sea impacting supply chains could cause further increases in goods prices adding uncertainty to the economic outlook.”
In December, the BoE fixed the benchmark interest rate at a 15-year high of 5.25 percent, warning that it would remain high to combat persistently increasing consumer prices.
Since late 2021, when inflationary pressures began to develop following the conclusion of the Covid epidemic, the ECB has raised interest rates 14 times in succession.
Inflation, however, rose to a 41-year high of 11.1 percent in October 2022, fueled by rising energy prices following Russia’s invasion of Ukraine.