Even though many economists had predicted a little decline to 3.8 percent, inflation unexpectedly climbed to 4 percent in December from 3.9 percent.
The ONS claims that rising costs for alcohol and tobacco products are the main reason for the increase. The surge defies the nine-month trend of inflation either steadily declining or being constant.
In October 2022, inflation reached a 41-year high of 11.1%. The Bank of England aims for two percent inflation.
Grant Fitzner, ONS chief economist, said: “The rate of inflation ticked up a little in December, with rises in tobacco prices due to recently-introduced duty increases.
“These were partially offset by falling food inflation, where prices still rose but at a much lower rate than this time last year.”
Core inflation, a rate that does not include volatile prices such as food and energy, rose to 5.2 per cent, up from 5.1 per cent.
How does my mortgage get affected by the rise in inflation?
The Bank of England has raised its base interest rate during the past two years in an effort to slow the rate of increase in prices, and mortgage rates normally follow suit. The market’s mortgage rates have increased as a result of these high rates.
Since September 2023, the bank’s base rate has remained at 5.25%. Lenders slashed mortgage rates in the first two weeks of 2024, anticipating another decline in inflation.
Nonetheless, the unanticipated increase of today would discourage lenders from further rate reductions, so it’s more likely that rates will stay where they are. This suggests that for the foreseeable future, housing expenses might be higher.
How does the inflation increase affect my pension?
Inflation might have an impact on the annual increase or decrease of your State Pension. The Triple Lock rule guarantees that your pension will increase by 2.5 percent, the average wages, or inflation, whichever is higher.
In April 2023, the State Pension increased by 10.1 percent to keep up with inflation. According to average wages, it is expected to increase by 8.5 percent in April of this year. As a result, the state pension will now be £221.20 per week instead of £203.85.
Private pensions are not directly impacted by changes in inflation, but their relative worth will be. Your pension’s relative spending power will decline if your funds increase more slowly than inflation.
How does the inflation increase affect food prices?
Food costs are still declining gradually in spite of the rise in inflation. Although the Consumer Price Index (CPI), the primary measure of inflation, has increased, this is not the only statistic that counts.
In fact, the inflation of food prices has decreased further, peaking at 19.2 percent in March 2023 and currently standing at 8.0 percent in December 2023.
Grant Fitzner, the chief of the ONS, notes that inflation would have probably stayed at 3.9 percent if not for growing costs associated with alcohol and tobacco.
Rachelle Earwaker, senior economist at the Joseph Rowntree Foundation said: “As winter sets in, now is a bad time for progress on inflation to stall. Inflation remains at double the Bank of England’s target, and the price of essentials like fuel and food are much higher than they were, with food inflation falling but still running high at 8%.”