UK inflation surged to 3.4% in December, driven mainly by increased prices of tobacco and airfares. This marked a rise from the 3.2% recorded in November and was the first increase in the headline rate in five months, contrary to the expectations of most economists.
Inflation, which tracks the changes in prices of goods and services over time, is reported monthly by the Office for National Statistics (ONS). The ONS attributed the December hike to a rise in tobacco duty, leading to higher cigarette prices, as well as elevated airfare costs during the festive season.
Additionally, the ONS highlighted increased expenses of certain food items like bread and cereals, partially offset by a decline in rent costs and lower oil prices, impacting raw material prices for businesses.
Grant Fitzner, the chief economist at the ONS, noted that the uptick in inflation was influenced by higher tobacco prices due to excise duty hikes and increased airfares, possibly related to return flights around the Christmas and New Year period. Rising food costs, particularly for bread and cereals, also contributed to the upward trend.
It was mentioned that the annual rise in factory goods prices remained steady, while the growth in raw material costs for businesses slowed, driven by reduced crude oil prices.
Inflation reflects the price increase of items compared to the previous year. When inflation decreases, it does not imply prices have stopped rising but that the rate of increase has slowed. If prices actually drop, it would signify deflation when inflation falls below 0%.
The Bank of England targets a 2% inflation rate, adjusting interest rates to manage inflation. Higher interest rates make borrowing costlier, reducing spending, lowering demand, and subsequently, prices. The base rate, which affects mortgage payments, fluctuated over time, hitting a peak of 5.25% in August 2023 before declining to 3.75%.
Inflation rose steadily in 2021, peaking at 11.1% in October 2022, primarily driven by energy and food price hikes. Energy demand surged post-Covid, aggravated by the Ukraine conflict, which also impacted food prices due to increased costs of fertilizers and animal feed.
Although inflation hit a three-year low of 1.7% in September 2024, it began to climb again in October 2024.
The ONS uses a “basket of goods” to calculate inflation, representing typical household purchases. The headline inflation figure represents an average, with individual item prices possibly deviating from this average.
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