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UK Inflation Surprises Higher in December

Unexpectedly, UK inflation reversed its downward trend for the first time in ten months.

The Consumer Prices Index rose to 4% year-on-year in December, a slight increase from the 3.9% recorded in the preceding month, as reported by the ONS on Wednesday. Notably, services inflation witnessed an uptick, while a core index, excluding volatile components like food and energy, remained constant at 5.1%. Services inflation, a focal point for Bank of England officials due to its implications for underlying price pressures, intensified to 6.4% in December, marking a modest rise from 6.3% in November. Conversely, food inflation exhibited a deceleration, descending to 8% from November's 9.2%. However, this was more than counterbalanced by a surge in alcohol and tobacco prices, which soared by 12.8% on a year-over-year basis. This pronounced hike in alcohol and tobacco prices primarily stemmed from tax increments on tobacco, as delineated in the Autumn Statement, the ONS elucidated.


Our Take: The rise was mostly due to special factors and a strong christmas shopping season. We do think inflation is going to decline further in the months to come closer to the 2% target. Inflation measured by Truflation is already below 3% and we expect the official numbers to mirror this shortly. That said, BoE rate cut pricing is still overly optimistic and likely to adjust somewhat following the data.


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