UK inflation increased to 3.4% in December, mainly due to higher prices for tobacco and airfare. This rise from the 3.2% recorded in November marks the first uptick in the headline rate in five months, contrary to the expectations of most economists.
Inflation, which tracks changes in the prices of goods and services, is reported monthly by the Office for National Statistics (ONS). The December surge was attributed to a hike in tobacco duty, leading to higher cigarette prices, and elevated airfare costs during the festive season.
The ONS also highlighted increased expenses for certain food items like bread and cereals. However, this was partially offset by a decline in rent prices and lower oil costs, impacting the prices of raw materials for businesses.
Grant Fitzner, the chief economist at the ONS, explained that the slight December inflation uptick was driven by higher tobacco prices due to recent excise duty hikes. Additionally, airfare prices rose compared to the previous year, likely linked to the timing of return flights around the Christmas and New Year period. Rising food costs, specifically for bread and cereals, also contributed to the upward trend.
While the prices of goods leaving factories remained stable, the rise in raw material costs for businesses slowed down, influenced by reduced crude oil prices.
Inflation reflects the increase in the cost of items compared to the previous year. If inflation stands at 3% and an item cost £1 in the past year, it would now be priced at £1.03. It’s crucial to note that a decrease in inflation does not indicate a halt in price increases but rather a slower rise. Deflation occurs when inflation dips below 0%.
The Bank of England targets 2% inflation and has adjusted interest rates over nearly two years to control inflation levels. When interest rates are higher, borrowing becomes costlier, leading to reduced spending and lowering demand, thus decreasing prices and inflation.
Although a higher base rate resulted in increased mortgage payments for many homeowners, the base rate was at 0.1% in December 2021. It peaked at 5.25% in August 2023 and has since been reduced six times to its current level of 3.75%.
In 2021, inflation began climbing and peaked at 11.1% in October 2022, primarily due to heightened energy and food expenses. The demand for energy surged post-Covid, further exacerbated by the Russian incursion into Ukraine, which also drove up food prices due to escalating costs of fertilizers and animal feed.
In September 2024, inflation hit its lowest point in three years at 1.7% before gradually rising in October 2024.