Inflation rises for first time in almost a year, fuelled by alcohol and tobacco tax hikes

The rate of Consumer Prices Index (CPI) inflation rose to 4 per cent in December, up from 3.9 per cent in November – marking the first increase since February last year.

The shock rise was largely driven by last November’s tax hike on tobacco, as well as higher alcohol prices and air fares, the ONS said.

Most economists had expected inflation to edge lower to 3.8 per cent.

The FTSE 100 Index fell 1.7 per cent to 7,427.4 as financial markets trimmed their rate cut expectations while the pound jumped on expectations that rates will now stay at 5.25 per cent for longer.

Sterling lifted 0.4 per cent to 1.27 US dollars and was also 0.4 per cent higher at 1.17 euros.

Economists said it was still likely the Bank will look to trim rates this year.

They cautioned that the path of inflation may not be smooth, with another possible increase in January and concerns over the impact of the Red Sea shipping attacks on prices, but are forecasting CPI to drop sharply over the coming months.

The increase in CPI came just hours after Rishi Sunak said the Government had met its pledge to halve inflation and claimed “it has continued to fall”.

Chancellor Jeremy Hunt insisted that the Government’s “plan is working”.

He 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.”

He said the inflation risk posed by the Red Sea crisis was one of the reasons for the UK-US military strikes against Houthi targets, as fears grow that it could push up the cost of oil, gas and goods.

Mr Hunt told broadcasters: “It’s precisely because we are concerned about what’s happening in the Red Sea that the UK has taken action with the United States and our other allies to secure freedom of navigation. We are obviously watching the situation very carefully.”

The surprise rise in UK inflation comes after alcohol and tobacco inflation hit a high of more than 31 years last month, at 12.8 per cent.

Tobacco prices surged by 16 per cent year on year in December while alcohol inflation hit 9.6 per cent as prices continued to rise after a duty rise on booze in August last year.

Air fares also rose as usual between November and December, up by 57.1 per cent, compared with a 61.1 per cent rise a year ago.

The annual rate for air fares was 0.8 per cent in December.

There was some relief for households as food inflation eased back sharply to 8 per cent last month, down from 9.2 per cent in November and the lowest rate since April 2022.

The latest data also showed the CPI measure of inflation including housing costs (CPIH) remained at 4.2 per cent in November while the Retail Prices Index (RPI) fell back to 5.2 per cent from 5.3 per cent.

Martin Beck, chief economic adviser to the EY Item Club, said while inflation is double the Bank’s 2 per cent target, it is still lower than policymakers had forecast.

He cautioned “there’s a good chance that inflation may rise again this month” but said hopes of a significant cut to energy bills in April and slowing UK wage growth should see inflation fall to 2 per cent by May.