Britain's unexpected inflation increase in December is unlikely to worry the BoE

Inflation increase: Inflation in the United Kingdom rose unexpectedly last month, primarily driven by significant increases in tobacco and alcohol prices, as per official figures released on Wednesday.

While this uptick might cause concern in other circumstances, economists believe it is unlikely to be a major worry for the Bank of England, particularly after the central bank recently concluded almost two years of interest rate increases. Despite the rise, inflation is considerably lower at the end of 2023 compared to the beginning of the year, when it exceeded 10 per cent.

Inflation remains below expectations

The Office for National Statistics reported that the consumer price index, a measure of inflation, reached 4 per cent in December, up from 3.9 per cent in the previous month. This marks the first increase in 10 months and contrasts with the expectations of most economists, who anticipated a slight decrease to 3.8 per cent.

Experts suggest that this increase is not likely to disrupt the Bank of England's plans, as inflation remains below its expectations. Lalitha Try, an economist at the Resolution Foundation, emphasised that while occasional bumps in the road are expected, the overall trend indicates that price rises are lower than the Bank of England anticipated in November.

Speculations about rate cuts

Since leaving its main interest rate at a 15-year high of 5.25 per cent in August, the Bank of England has faced speculation about potential rate cuts due to a recent decline in inflation. The central bank has successfully brought down inflation from a four-decade high of over 11 per cent, but reaching its target of 2 per cent remains a goal. With food and energy prices showing a downward trend, there is optimism that the target could be achieved this year, potentially leading to a reduction in interest rates.

The interest rate increases, implemented to counter the surge in inflation triggered by supply chain disruptions during the pandemic and the Russia-Ukraine conflict, have contributed to the battle against inflation. However, the resulting impact on consumer spending, particularly through higher mortgage rates, has exerted pressure on the sluggish British economy, which is experiencing minimal growth.

Looking ahead, the prospect of continued high borrowing rates and subdued economic growth is likely to shape the backdrop for the upcoming general election, expected within a year. This scenario poses a concern for the Conservative Party, as opinion polls currently indicate a substantial lead for the main opposition Labour Party ahead of the vote.

(with PTI inputs)