LONDON — UK inflation unexpectedly rose to 4% year-on-year in December, surpassing economists’ predictions. While analysts had anticipated a slight decline in the annual headline consumer price index to 3.8%, the figure exceeded expectations. November had witnessed a sharper-than-expected fall, bringing the rate down to 3.9%.
Against a consensus forecast of 0.2%, the month-on-month headline CPI increased by 0.4%, following a -0.2% figure in November.
The core CPI, a closely watched indicator that excludes volatile prices of food, energy, alcohol, and tobacco, stood at an annual rate of 5.1% – unchanged from November and higher than the 4.9% forecasted by Reuters.
The Bank of England, having gradually raised interest rates in recent years to combat rising inflation, is set to convene for its next monetary policy meeting on February 1. However, a fresh round of jobs data released on Monday highlighted the challenges that lie ahead for the central bank. As it contemplates whether and how sharply to cut interest rates in 2024, markets are presently pricing in more than 100 basis points of reductions to the benchmark rate throughout the year.
Over the final quarter of 2023, the number of job vacancies posted witnessed a decline of 49,000, while the unemployment rate remained largely steady at 4.2%.
The three months leading up to the end of November witnessed a significant slowdown in pay growth, a crucial data point for the Bank of England. Considering that inflation is decreasing at a faster rate than pay growth, average earnings are still growing in real terms.
Amidst these developments, it becomes increasingly important for the Bank of England to navigate the uncertain economic landscape strategically. Balancing the need to control inflation with the challenges posed by a potentially weakening labor market will require careful consideration and informed decision-making.
As investors and market participants eagerly await the central bank’s monetary policy decision in February, the focus on economic indicators remains crucial for assessing the ongoing impact of inflation and employment trends.
The unexpected rise in UK inflation serves as a reminder that the path to economic recovery may not be as smooth as anticipated. The Bank of England’s decision on interest rates will undoubtedly play a vital role in shaping the trajectory of the economy in the coming months.
