U.K. inflation edges higher, halting 10-month decline

Inflation in Britain rose slightly in December, picking up for the first time in almost a year, after a change in tobacco taxes pushed up prices.

Consumer prices rose 4% in December from a year earlier, up from 3.9% the previous month, the Office for National Statistics said Wednesday. Despite the unexpected uptick, inflation is still near its slowest pace in two years and well below where the nation’s central bank thought it would end in 2023.

About a year ago, with inflation above 10%, Prime Minister Rishi Sunak made several pledges to the British public on the economy, migration and the health service. Wednesday’s data confirms that he met one of those — to cut Britain’s inflation rate in half.

It’s a much-needed win for the government as it begins an election year with Sunak’s political party trailing in the polls.

But even as households may be relieved that prices aren’t rising as quickly, the cumulative effect of high inflation is still being felt. For example, food and nonalcoholic drink prices are up 26% in the past two years.

Sunak’s aim was to see the inflation rate halved, but the Bank of England, which is responsible for controlling inflation, has a mandate to bring it all the way down to 2% and has raised interest rates aggressively to do so.

The situation appears to be changing quite quickly now.

Inflation could drop to 2% as soon as the spring, around April or May, according to economists at Goldman Sachs, ING, Oxford Economics and elsewhere. That would bring it to the target about a year and a half earlier than the Bank of England recently forecast.

But it matters whether inflation stays at 2%. And there, the data is less certain, according to Michael Saunders at Oxford Economics and a former Bank of England rate-setter.

The decline in headline inflation reflects a fall in global goods and energy prices, “rather than a major slowdown in underlying domestic inflation pressures,” Saunders wrote in a note this week.

Pay growth and price pressures in services will be slower to retreat and are likely to stay above levels consistent with 2% inflation, he added.

Annual growth in pay was 6.6% from September through November, data published Tuesday showed. Services inflation was 6.4%, slightly higher than in November. Core inflation, which excludes food and energy prices, was 5.1%, the same as the previous month.

There’s some concern that downward momentum in inflation could be stalled by conflict in the Middle East pushing up the cost of energy and consumer goods because of the disruption to shipping in the Red Sea. As ships travel the long way round the southern coast of Africa, the cost of shipping has surged, and those increases could make their way to consumers.

Last week, the head of Tesco, Britain’s largest grocery retailer, warned that prices on some items could be pushed up but said it was too early to tell. Marks & Spencer said it might need to absorb higher costs and there could be some delays to new clothing in the next two months. Retailer Next has also warned of delays of stock deliveries.

In about two weeks, the Bank of England will publish its latest projections on inflation and economic growth, which traders and analysts will parse for clues of how soon interest rates might be cut from their current levels, which are the highest since 2008 at 5.25%.

Amid the sharp drop in inflation, traders are betting that the first cut will come during the second quarter of the year — certainly by June, but maybe as soon as May.

By the end of the year, traders are betting, rates will be back below 4%.