UK inflation faces December bump from travel and food costs
UK inflation may have edged higher at the end of last year, with Christmas travel and higher duties pushing up prices, economists have warned.
Several forecasters expect the Consumer Prices Index (CPI) to have ticked up in December after falling sharply in November.
Economists at Pantheon Macroeconomics say they expect inflation to rise to 3.3 per cent, from 3.2 per cent the month before.
This is due to a surge in travel-related costs, as well as higher tobacco duties.
Airfares and hotel prices are thought to have jumped amid strong demand for festive getaways, with analysts estimating flight prices rose by around 30 per cent between November and December.
But economists stressed that the outcome will depend heavily on when the Office for National Statistics (ONS) collected its price data, as travel costs varied sharply across the month.
Andrew Goodwin, chief UK economist at Oxford Economics, said the recent easing in the cost of living had likely “temporarily halted” in December.
“Some of November’s downward pressure came from volatile categories, including clothing, airfares and accommodation services, and this is likely to have unwound in December” he said.
He added that the timing of data collection would be “crucial” for the final inflation reading.
Goodwin is forecasting a sharper rise in CPI inflation to 3.6 per cent.
Divided forecast ahead of Bank decision
Yet, not all analysts agree that inflation rose last month.
Economists at Barclays, for examplw, said they expect the headline rate to have remained unchanged at 3.2 per cent, predicting slower energy price inflation and steadier food and drink costs towards the end of the year.
Despite short-term volatility, economists broadly believe inflation will trend lower over this year.
Victoria Scholar, head of investment at Interactive Investor, said: “November’s budget from the chancellor was largely viewed as disinflationary owing to its contractionary fiscal measures, including tax increases and spending cuts”.
“There are also growing signs of slack in the labour market, which should ease inflationary pressures.”
Bank of England data published last week showed firms expect wage growth to slow over the year ahead, although policymakers remain cautious.
The Bank’s decision makers’ panel survey suggested expected wage growth of 3.7 per cent, down from the 4.3 per cent firms reported in December, but still high enough to concern rate-setters.
Elsewhere, Pantheon’s chief UK economist Rob Wood warned the data would not give the Monetary Policy Committee a green light for aggressive rate cuts.
“Wage and price pressures remain stubborn”, he said, adding that Pantheon expects just one further interest rate cut this year.
Food prices remain a pressure point
Separate data suggests food costs remain a major source of pressure for households.
Figures from the British Retail Consortium (BRC) showed food inflation rose to 3.3 per cent in December, up from three per cent in November, with fresh food prices climbing to 3.8 per cent.
Helen Dickinson, chief executive of the BRC, said retailers were working to keep prices down but warned that higher public policy costs and regulation could keep inflation “sticky”.
Meanwhile, a recent KPMG survey found 81 per cent of Brits who believe the country is getting worse cite grocery prices as their main concern.
While overall shop price inflation remained low at 0.7 per cent, the Bank of England will be watching closely for signs that food and services inflation could entrench higher price expectations among consumers.
The official inflation data is due to be published shortly ahead of the Bank’s next interest rate decision, with policymakers split over whether easing price pressures are sufficient to justify further cuts.