Inflation surprisingly rises after cost of tobacco increases

The annual rate of inflation has surprisingly risen, official figures show.

The consumer price index (CPI) measure of inflation stood at 4% in the year to December, according to the Office for National Statistics (ONS). A fall to 3.8%, had been expected by economists polled by Reuters.

But instead, inflation rose by 0.1 percentage points from 3.9% in the 12 months to November.

The full effects of increased shipping costs due to Red Sea diversions will not have been captured by the data.

Houthi fighters have been targeting commercial ships – with the UK and US responding with airstrikes last week. As a result, shipping prices had the steepest rises towards the end of the month.

The greatest contributor to the growth in inflation was the increased cost of tobacco and alcohol – which are categorised together – the ONS said, as the government upped smoking duties in the autumn statement.

“The increase in the annual rate was largely the result of the increase in tobacco duty”, it said.

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Effects of shipping disruption and possible delivery delays will be worst felt by consumers in Europe, an executive at the global logistics company DP World said.

“The cost of goods into Europe from Asia will be significantly higher,” said DP World chief financial officer Yuvraj Narayan.

“European consumers will feel the pain… It will hit developed economies more than it will hit developing economies.”

The inflation data comes as a number of chain retailers put more items on sale earlier. Industry data showed a third of all spending in the weeks up to Christmas was on items with some kind of offer.

Similarly, the pace of wage rises has slowed. Official figures published on Tuesday recorded that pay packets were growing at a reduced annual rate than previously – 6.6% compared to 7.3% a month earlier.

Such increases in the annual rate are not what the interest rate setters in the Bank of England will want to see when considering the rates.

The Bank raised the base interest rate 14 consecutive times up to August and then held rates at 5.25%, making lending more expensive, in an effort to bring down price rises.

Another measure of inflation of note to the rate setters has remained the same. Core inflation, which looks at price rises excluding volatile categories such as food and energy, stayed at 5.1%. And food inflation also fell again, to 8% from 9.2% in November.

Markets are expecting the Bank’s base interest rate to come down to 5% in May.

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Responding to today’s figures Chancellor Jeremy Hunt said: “As we have seen in the US, France and Germany, inflation does not fall in a straight line, but our plan is working and we should stick to it.

“We took difficult decisions to control borrowing and are now turning a corner, so we need to stay the course we have set out, including boosting growth with more competitive tax levels.”

Labour’s shadow chancellor, Rachel Reeves, responded: “Any rise in inflation is bad news for families who are worse off after 14 years of economic failure.

“Prices are still rising in the shops, with the average weekly shop £110 more than it was before the last general election, and the average family set to be £1,200 worse off under Rishi Sunak’s tax plan. Britain cannot afford another five years of economic failure.”

And the Liberal Democrats’ treasury spokesperson Sarah Olney said: “Today’s inflation statistics will offer little comfort to people across the country that are seeing their pay stretched as the cost of living crisis continues to rage on.”