UK Inflation on the Rise Again

After a stagnancy of almost 10 months, UK inflation unexpectedly picked up, sending signals that rate cuts from the BOE might not be on the agenda anytime soon this year.

• CPI rose 4% from a year earlier in December.

• Economists had expected a slight fall to 3.8%.

• Services inflation also increased.

 

Source: UK Office for National Statistics

The figures might be seen as an indicator of a global shift away from aggressive bets on lower rates.

Last week also saw US inflation coming out higher than expected, with ECB President Christine Lagarde stating that market expectations are not exactly helping policy makers in their fight against inflation.

Moreover, the surprise increase in inflation have eliminated any optimism of slowing price pressures in Britain.

BOE Governor Bailey is still insisting on his higher-for-longer messaging on rates, warning that this month’s CPI figures might show an increase caused by higher household energy bills.

• Bonds tumbled.

• GBP gained as traders aggressively trimmed expectations for monetary-policy easing this year.

“Today’s inflation figures show it isn’t ‘job done,’” said Alpesh Paleja, lead economist at the Confederation of British Industry.

“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.”

 

BOE officials have also been watching for signs of underlying pressures on prices, with services inflation accelerating to 6.4% in December from 6.3% in November.

 

Source: Statistics agencies

In fact, inflation is still performing well below where the central bank had predicted in its November forecasts. This has allowed PM Sunak’s government to take credit for meeting its pledge to cut the level of price increases in half last year.

Forecasters have also predicted that inflation could be back to the BOE’s 2% target by April, just when another drop in household energy bills is expected.