Interest rates could still be cut this spring despite yesterday’s surprise rise in inflation, experts predict.
The rate increased unexpectedly for the first time in nearly a year, driven by rising tobacco and alcohol prices.
Official figures show inflation rose to 4% in December, up from 3.9% the previous month – but it still means Prime Minister Rishi Sunak met his promise to halve inflation by the end of 2023.
After yesterday’s rise, economists cautioned the path of inflation may not be smooth and warned figures for January may show another increase, amid concerns over the impact of the Red Sea shipping attacks.
However they said it could still drop sharply in the coming months.
And they said it is likely the Bank of England will still look to trim interest rates towards the end of spring.
Chancellor Jeremy Hunt insisted the Government’s plan is the right one. He said: “As we have seen in the US, France and Germany, inflation does not fall in a straight line.
“But our plan is working and we should stick to it.”
He said the inflation risk posed by the Red Sea crisis was one of the reasons for the UK-US military strikes on Houthi targets, as fears grow the rebels’ attacks on ships could push up the cost of oil, gas and goods.
Mr Hunt told broadcasters: “It’s precisely because we are concerned about what’s happening in the Red Sea that the UK has taken action with the United States and our other allies to secure freedom of navigation.
“We are obviously watching the situation very carefully.”
Martin Beck, of economic forecasting group the EY Item Club, said hopes of a significant cut to energy bills in April, coupled with slowing UK wage growth, should see inflation fall to 2% by May.
And he added: “This should give the green light for the Monetary Policy Committee to start cutting interest rates in the same month, with the EY Item Club expecting bank rates to fall from the current 5.25% to 4% by the end of this year.”
Julian Jessop, of the Institute of Economic Affairs, was also confident of an interest rate reduction.
He said: “The tick-up in UK inflation to 4% in December will probably delay the first rate cut…but one small miss in one month’s data does not change the big picture.
“Inflation is still likely to fall to the 2% target in April and the markets will continue to price in large rate cuts later in the year.”
The rise came after alcohol and tobacco inflation hit a 31-year high last month, at 12.8%.
Tobacco prices were up 16% on year in December after a tax hike in November.
Alcohol inflation hit 9.6% as prices continued to rise after duty on booze was increased in August.
Air fares also soared as usual between November and December, up by 57.1% – but that compared to a 61.1% rise a year ago.
There was some relief for households as food inflation eased back sharply to 8% last month, down from 9.2% in November and the lowest it has been since April 2022.
But the latest figures hit the FTSE 100 Index yesterday. Around £40billion was wiped off its total value in the worst day of trading since July.
