The UK consumer price index (CPI) fell to 4.0% year-over year in December, up slightly from the November reading of 3.9%. The reading surprised the markets, as the estimate stood at 3.8%. On a month-over-month basis, CPI increased 0.4%, compared to -0.2% in November and above the estimate of 0.2%. The main driver of the rise in inflation was higher alcohol and tobacco prices.
Core CPI, which excludes volatile items such as alcohol and tobacco, was unchanged at 5.1% and higher than the estimate of 4.9%. The core rate jumped 0.6% month-over-month, after a 0.3% decline in November and above the market estimate of 0.4%.
UK inflation has been steadily falling as the Bank of England’s aggressive rate tightening has cooled the economy and pushed inflation lower. The 3.9% gain in November was the lowest inflation rate in almost two years and the upswing in December was the first increase in inflation in ten months.
The higher-than-expected inflation numbers are a nasty surprise for the Bank of England (BoE), in particular the monthly core CPI gain of 0.6%. The core rate is closely monitored by the BoE as it considered a better indicator of inflation trends than CPI.
At the same time, one disappointing inflation report may make headlines but it won’t be enough of a reason for the BoE to change its current rate path of ‘higher for longer’, in which the BoE has paused rates for three straight months. If inflation continues to rise, however, the BoE may have to consider raising rates, which it would prefer to avoid as consumers and businesses are feeling squeezed by high inflation and elevated borrowing costs.
An interesting note is that inflation also rose in December in the US, France, Germany and Canada. British Finance Minister Jeremy Hunt, no doubt looking for a silver lining the inflation release, referred to the fact that inflation was rising in other major economies, noting that, “inflation does not fall in a straight line”.
British Pound Edges Higher, UK Stock Market Slides
In the Forex market, the British Pound has gained ground after today’s inflation report. The GBP/USD currency pair started the day with small losses but has rebounded and climbed 0.40% since the release. In the European session, the British Pound is trading at 1.2667.
The FTSE 100 Index, which is the benchmark index for the UK stock markets, is sharply lower today. In the European session, the index is down 104.06 points (1.42%) at 7451.63.