UK inflation increased to 3.4% in December, primarily driven by higher prices for tobacco and airfares. This uptick from the 3.2% recorded in November marks the first rise in the headline rate in five months, in line with expectations of most economists.
Inflation reflects changes in the prices of goods and services over time, with monthly data provided by the Office for National Statistics (ONS). The December surge was attributed to a rise in tobacco duty, leading to higher cigarette prices, and elevated airfare costs during the festive season. Additionally, increased prices of certain food items like bread and cereals contributed to the inflation spike, partially offset by reduced rent and lower oil expenses benefiting raw material costs for businesses.
Grant Fitzner, ONS’s chief economist, explained that the slight December inflation increase was influenced by higher tobacco prices due to recent excise duty hikes. Airfare prices also played a role, rising more compared to the previous year, likely due to return flight timing during the Christmas and New Year period. While food costs, particularly bread and cereals, increased, this was balanced by declining rents and lower prices for recreational and cultural purchases.
Inflation indicates how much more expensive items are compared to the previous year. For instance, with 3% inflation, an item that cost £1 last year would now cost £1.03. Notably, a decrease in inflation does not imply prices have stopped rising; rather, they continue to rise albeit at a slower pace. In case prices decrease, it is termed deflation, occurring when inflation drops below 0%.
The ONS computes inflation based on a regularly updated basket of goods and services reflecting consumer purchases. The headline inflation figure represents an average, with individual prices of specific goods potentially differing from this average.
The Bank of England targets 2% inflation and had raised interest rates gradually over nearly two years to curb inflation towards this goal. The strategy involves making borrowing costlier with higher interest rates, reducing disposable income and demand, subsequently lowering prices and inflation. However, the increased base rate led to higher mortgage payments for many homeowners, straining household finances. While the base rate stood at 0.1% in December 2021, it peaked at 5.25% in August 2023 before being reduced six times to the current 3.75%.
Inflation surged in 2021, peaking at 11.1% in October 2022, primarily due to escalating energy and food expenses. Energy demand rose post-Covid, exacerbated by the Russian invasion of Ukraine, which also raised food prices due to increased costs of fertilizers and animal feed. In September 2024, inflation hit a three-year low at 1.7% but began climbing again in October 2024.