British inflation unexpectedly rose in December, data showed Wednesday, dashing expectations of a slowdown, dimming hopes of an early interest rate cut and prolonging a cost-of-living squeeze before an election.
The Consumer Prices Index accelerated slightly to four percent last month, as rising alcohol and tobacco prices sparked the first increase since February, the Office for National Statistics said in a statement.
That is double the Bank of England’s official target of two percent and the highest level in the Group of Seven rich nations.
The hotter-than-expected data is a blow to embattled Conservative Prime Minister Rishi Sunak, who is trailing behind opposition Labour leader Keir Starmer in opinion polls ahead of a general election this year.
Britain’s recession-threatened economy is already buckling under a cost-of-living crisis and increasing industrial unrest over pay.
The BoE has lifted interest rates to a 15-year peak in a bid to dampen inflation, but this has worsened the squeeze because commercial lenders pass on loan costs to businesses and consumers.
“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.
Analysts predict inflation will slow this year but warn that shipping costs will increase as a result of ongoing attacks on global trade transiting the Red Sea.
Markets are waiting to see when major central banks, notably the US Federal Reserve, European Central Bank and BoE, will start to cut interest rates as inflation cools.
“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.”
The BoE had in December frozen its key interest rate at a 15-year peak of 5.25 percent — and warned that it will remain elevated to tackle stubbornly high consumer prices.
The bank implemented 14 hikes in a row since late 2021, when inflationary pressures started to build after the end of the Covid pandemic.
Yet inflation surged to a 41-year high at 11.1 percent in October 2022, stoked by spiking energy prices after the invasion of Ukraine by major oil and gas producer Russia.