UK inflation climbed to 3.4% in December, primarily fueled by increased prices for tobacco and airfares. This uptick from November’s 3.2% marks the first rise in the headline rate in five months, aligning with economists’ expectations for a slight inflation increase in December.
Inflation tracks the changes in prices of goods and services over time, with monthly data provided by the Office for National Statistics (ONS). The ONS attributed the December inflation rise to higher tobacco duty, driving up cigarette prices, and elevated airfare costs during the festive season.
Additionally, the ONS highlighted increased expenses for certain food items like bread and cereals, offset partially by decreased rent and lower oil prices, impacting raw material costs for businesses.
Grant Fitzner, ONS Chief Economist, explained that the rise in inflation in December was influenced by elevated tobacco prices due to recent excise duty hikes. Airfares also contributed to the increase, likely due to higher prices during the Christmas and New Year period. Rising food costs, particularly for bread and cereals, were other contributing factors.
Inflation signifies how much more expensive goods are compared to the previous year. When inflation decreases, it doesn’t imply prices have stopped rising, rather that they are increasing at a slower rate. On the other hand, deflation occurs when inflation falls below 0%.
The ONS calculates inflation based on a dynamic “basket of goods” that represents typical household purchases. The headline inflation figure serves as an average, with individual prices of specific goods potentially deviating from this overall figure.
The Bank of England targets a 2% inflation rate and has adjusted interest rates to manage inflation levels. Higher interest rates make borrowing costlier, reducing spending and demand, which can lower inflation. In December 2021, the base rate was at 0.1%, having peaked at 5.25% in August 2023 and subsequently reduced to 3.75%.
Inflation surged in 2021, reaching 11.1% in October 2022, primarily driven by escalating energy and food costs. Post-Covid energy demands were compounded by the Russian invasion of Ukraine, intensifying energy costs. The conflict also elevated food prices due to increased expenses for fertilizers and animal feed.
After hitting a three-year low of 1.7% in September 2024, inflation began to climb again in October 2024.