The Bank of England increased interest rates 14 times consecutively during December 2021 and August 2023.
The United Kingdom’s annual consumer price inflation (CPI) rose for the first time in over 10 months last December. It surged to 4% from the November 3.9%, a level not seen in the last two years. It fouled the estimations of the market for an early Bank of England interest rate reduction.
Some economists suggest that a sharp rise in tobacco duty and an even larger impact from the surge of seasonal airfare contributed to the rise in CPI, shadowing the expectations of a drop of up to 3.8%.
Pound Sterling strengthened, and bond yields of the British government surged after the data release. The interest rate futures trading at centralized exchanges depicted an approximately 60% chance that the Bank of England would begin slashing down rates from mid-May. This is done from the prediction of 80% at just the beginning of the week.
The Bank of England increased interest rates 14 times consecutively during December 2021 and August 2023. It took the rates from 0.1% at the start of December 2021 to a 15-year high of 5.25% in August. This was mainly due to the inflation that had risen to a 41-year high of 11.1% in late 2022 and was stubborn to come down from there.
Last year, inflation started to spiral down faster than expected in the later months. This made many economists believe that it would come down to the central bank’s target of 2% by April or May of this year, 18 months sooner than the Bank of England’s estimations.
The surge in the UK’s inflation in December was after a rise registered in the eurozone and the United States. It was different from early 2023 as British inflation was substantially lower than other bigger and more advanced economies.
Michael Saunders, ex-policymaker of the Bank of England, said that the broader image is that inflation is falling more rapidly than the central bank anticipated a few months ago. This will, in turn, push them to think of reducing interest rates possibly by the end of this year or maybe start rate cuts in the middle of the year.
British Prime Minister Rishi Sunak is facing a lot of challenges for the upcoming election as household living standards have drastically fallen over the past two years due to super-high inflation. He has also suggested he might hold a nationwide electron in the second half of this year.
The outlook for the British economy for 2024 remains weak. The economy grew by just 0.2% in the past year till the end of November.
CPI Contributors
The British Office for National Statistics said that December’s inflation increment was due to a surge in tobacco duties that came into effect in late November. It drove tobacco prices to a level last seen in 1992, contributing almost 0.1% points to CPI.
Airfare costs significantly contributed to CPI. Flights had shown a seasonal increase in costs in December 2023 like the year before. In 2023, the ONS increased airfares weighting in the inflation, impacting the overall inflation.
Core inflation, which omits volatile food, energy, alcohol, and tobacco prices, remained unchanged at 5.1% last December, fouling the expectations of economists of a fall to 4.9%. It was the first month since July that it had not fallen.
There is pressure from clothing and entertainment prices as well. They were slightly balanced by a decrease in the annual rate of inflation for food and non-alcoholic beverages to 8.0% from 9.2%.
Services inflation surged to 6.4% in December from 6.3% in November; in the meanwhile, goods inflation decreased to 1.9%, its lowest since April 2021.
The Bank of England views both the core CPI and services inflation as its benchmark for underlying price pressures in the economy because the latter is an indicator of a rise in wage costs.
