UK inflation increased to 3.4% in December, driven mainly by higher tobacco and airfare costs. This rise from the 3.2% recorded in November marks the first uptick in the headline rate in five months, aligning with the expectations of most economists.
Inflation, which indicates changes in the prices of goods and services over time, is regularly reported by the Office for National Statistics (ONS) monthly. The December surge was attributed to a rise in tobacco duty, elevating cigarette prices, and the seasonal spike in airfare prices during the festive period.
The ONS also highlighted increased costs of certain food items like bread and cereals, partially offset by reduced rent and lower oil prices benefiting businesses by lowering raw material costs. Grant Fitzner, the ONS chief economist, mentioned that the slight December inflation uptick was fueled by higher tobacco prices due to excise duty hikes, with airfare and food costs also contributing.
The Bank of England has a 2% inflation target and has adjusted interest rates over nearly two years to curb inflation. The concept is that higher interest rates make borrowing costlier, reducing spending and demand, ultimately lowering prices and inflation. However, the recent base rate of 0.1% in December 2021 led to increased mortgage payments for many homeowners.
Inflation had peaked at 11.1% in October 2022 due to higher energy and food expenses, accentuated by increased energy demand post-Covid and the Russian invasion of Ukraine. While inflation dropped to 1.7% in September 2024, it began rising again in October 2024 after hitting a three-year low.