What goes up must come down, or should it? ONS figures show inflation rates have unexpectedly increased
The Office of National Statistics (ONS) have reported that inflation rates increased in December for the first time in 10 months, casting questions on the Bank of England’s next move.
Figures from the ONS, which were released this morning, show inflation rates increased to 4.0% in December as a result of rising tobacco and alcohol costs that began after chancellor Jeremy Hunt announced higher duty in the autumn statement.
Researchers found that tobacco prices increased by 16% on the year while alcohol was up 9.6% – this is the most both of these things have contributed to inflation rates since 2006.
Following this, the pound also increased on Wednesday as investors theorised that higher levels of inflation could force the Bank of England to keep interest rates set at the highest level since the 2008 financial crisis for longer than anticipated.
Various charities and organisations have reacted to the news, including the Joseph Rowntree Foundation (JRF) – a charity working to end poverty. Rachelle Earwaker, a senior economist at JRF said: ‘As winter sets in, now is a bad time for progress on inflation to stall. Inflation remains at double the Bank of England’s target, and the price of essentials like fuel and food are much higher than they were, with food inflation falling but still running high at 8%.
‘Anyone who needs to use their heating to stave off freezing temperatures this week can expect to pay over 80% more than what they did three years ago.’
‘Price rises have outstripped increases in benefits which won’t increase again until April, and, even then, won’t make up the difference,’ Rachelle said. ‘Around 6.6 million low-income households (56%) reported not having enough money for either food or heating their home between May and October 2023. Around 2.4 million households (20%) didn’t have enough money for both food and heating.’
Although there has recently been a small increase in the headline rate of inflation, it has fallen back to more than Threadneedle Street was expecting in November. Economists agreed it was probably still on track to drop below the Bank’s 2% target by spring but warned against expectations for a smooth decline.
Inflation figures for this month will be published in February and will consider the 5% rise in the Ofgem energy price cap, which could have the potential to drive up the headline rate of inflation. City economists are expecting the cap to fall by around 10% in April amid a wider decline in wholesale prices.
Commenting on the new figures, 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.’
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