UK inflation rises to 4% in December, posing dilemma for central bank

By Aysu Bicer

LONDON (AA) - The UK inflation unexpectedly rose to 4% in December, from November’s 3.9%, raising questions over how soon the country’s central bank will start cutting interest rates.

The Office for National Statistics (ONS) revealed that the surge was primarily attributed to a government-led increase in tobacco duty, announced by Chancellor Jeremy Hunt during the autumn statement.

Economists had initially anticipated a decline, but the surprise uptick was driven by a sharp spike in tobacco and alcohol prices, up 12.9% in December compared to the previous month.

This unexpected increase came at a time when there were widespread expectations of interest rate cuts to stimulate economic activity.

"Falling sharply since its peak in October 2022, the inflation rate has surprised many analysts, prompting expectations of interest rate cuts. However, the recent uptick in December suggests that the inflationary landscape may still hold surprises for policymakers and economists alike," said Grant Fitzner in an interview with the BBC's Today program.

The central bank had been widely expected to initiate interest rate cuts as early as May, especially given the recent decline in inflation and weaker economic growth. However, these new figures may complicate the timing of such cuts, as the bank seeks to strike a balance between stimulating economic activity and controlling inflation.

Financial markets had been anticipating rate cuts in 2024, given the sharp decline in the inflation rate from its peak of 11.1% in Oct. 2022, the highest in 40 years.

The bank's base rate is at 5.25%, a 15-year high.