UK inflation climbed to 3.4% in December, primarily fueled by increased tobacco and airfare costs.
The latest figure represents a rise from the 3.2% recorded in November, marking the first uptick in the headline rate in five months. Most economists had anticipated a slight inflation uptick for December.
Inflation gauges the price changes of goods and services over time, with monthly data provided by the Office for National Statistics (ONS).
The ONS attributed the December upsurge to a spike in tobacco duty, leading to higher cigarette prices, and elevated airfare costs during the festive season. Additionally, some food items like bread and cereals saw price hikes, although these were partly offset by lower rent and reduced oil prices, impacting raw material costs for businesses.
Grant Fitzner, the ONS chief economist, stated that the December inflation increase was driven in part by rising tobacco prices due to recent excise duty hikes. Airfares also contributed to the spike, with prices exceeding those from a year ago, likely influenced by return flight timings around the Christmas and New Year period. Increased food expenses, particularly for bread and cereals, also played a role.
These inflationary pressures were somewhat balanced by a decline in rental inflation and cheaper recreational and cultural purchases. Factory goods’ price annual increase remained stable, while a deceleration in raw material costs for businesses was observed, influenced by lower crude oil prices.
Inflation reflects how much more costly something is compared to the previous year. For instance, with a 3% inflation rate, an item that cost £1 last year would now cost £1.03.
It’s crucial to note that a decrease in inflation doesn’t indicate that prices have stopped rising; rather, it suggests a slower upward trend. Deflation occurs when inflation drops below 0%.
The ONS computes inflation based on a regularly updated “basket of goods” and services representing consumer purchases. The headline inflation figure serves as an average, implying that individual prices may vary from this general figure.
The Bank of England aims for a 2% inflation target. Over nearly two years, it raised interest rates to help steer inflation back to this benchmark. Higher interest rates make borrowing costlier, reducing disposable income and curbing demand, consequently moderating prices and lowering inflation.
While rising base rates led to increased mortgage payments for many homeowners, the base rate was at 0.1% in December 2021, having peaked at 5.25% in August 2023 before being lowered six times to the current 3.75% level.
Inflation saw a gradual rise in 2021, reaching a peak of 11.1% in October 2022, mainly driven by elevated energy and food costs. Post-Covid energy demand surged and was further exacerbated by the Ukrainian conflict, which also inflated food prices due to escalating fertiliser and feed expenses.
In September 2024, inflation hit a three-year low of 1.7% before beginning to climb again in October 2024.