What is behind the surprise rise in inflation and what does it mean for rates?
The Office for National Statistics said the rate of Consumer Prices Index inflation rose to 4% in December, up from 3.9% in November.
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Your support makes all the difference.UK inflation rose for the first time in nearly a year last month, catching financial markets and economists off guard.
The Office for National Statistics (ONS) said the rate of Consumer Prices Index (CPI) inflation rose to 4% in December, up from 3.9% in November.
It has dashed hopes of an early interest rate cut, sending the FTSE 100 Index tumbling lower and sparking concerns that mortgage lenders may start increasing borrowing costs again.
Here the PA news agency looks at what is behind the unexpected rise and worries over the outlook for rates.
– What is inflation and why has it risen?
Inflation is the term used to describe rising prices. The inflation rate refers to how quickly prices are going up.
If the price of something rises from £10 to £11 over a year, then that would represent annual inflation of 10%.
The ONS said the main drivers behind the surprise increase in inflation last month were increases in tobacco prices after November’s tax hike on tobacco, as well as higher alcohol prices and airfares.
– What does it mean for interest rates?
Financial markets have trimmed their bets on an early interest rate cut after the inflation rise, given that most experts were expecting CPI to fall to 3.8%.
There are also concerns that inflation may edge higher again in January.
This means that the Bank of England may want to keep rates at 5.25% for longer.
Its remit is to keep inflation at 2% and policymakers have been battling to bring CPI back down amid the cost-of-living crisis.
While inflation has fallen significantly since hitting an eye-watering 11.1% in October 2022, it is still double the target.
– What about mortgage costs?
Mortgage rates have been falling in recent weeks, with many lenders starting the new year by chopping rates.
But some housing market experts said the acceleration in inflation could mean lenders are more cautious, as expectations of a rate cut are pushed back, possibly halting the declines in mortgage costs.
– Does this mean rate cuts are off the cards?
Most economists are optimistic that the Bank will still look to cut rates in 2024, although this is unlikely until inflation comes back to target.
There are no guarantees that the path of inflation will be smooth, but experts said falling food prices, hopes of a significant cut to energy bills in April and slowing UK wage growth should see inflation fall to 2% over the coming months.
Martin Beck, chief economic adviser to the EY Item Club, said this could allow the Bank to cut rates, possibly as soon as May.
– But what about worries over the Red Sea attacks?
There are fears that the attacks in the Red Sea could push up the cost of oil, gas and goods being imported to the UK, leading to higher inflation.
The attacks on shipping using the crucial sea route by the Iran-backed Houthi rebels in Yemen has forced some firms to divert vessels around Africa rather than using the Suez Canal to travel between Europe and Asia, adding transport costs and time delays.
Retailers and supermarkets have recently warned over the impact of this on stock shipments and costs if the disruption continues.
While this is not yet seen an impact on inflation yet, there are worries it could add as much as a 0.7 percentage point increase to inflation in Europe, and could push global inflation up by around 0.5 percentage points.
Mr Beck said: “However, shipping costs represent only a relatively minor contribution to the prices consumers pay for goods.
“It’s therefore hard to see how shipping issues could present a serious inflationary threat.”