UK inflation increased to 3.4% in December, primarily driven by higher prices for tobacco and airfares. This uptick from the 3.2% recorded in November marks the first rise in the headline rate in five months, in line with the expectations of most economists.
Inflation reflects the changes in prices of goods and services over time, with monthly data provided by the Office for National Statistics (ONS). The ONS attributed the December rise to a hike in tobacco duty, leading to higher cigarette prices, as well as increased airfare costs during the festive season.
Additionally, the ONS mentioned elevated expenses for certain food items like bread and cereals, partially offset by a decrease in rent and lower oil prices, impacting raw material costs for businesses. Grant Fitzner, ONS’s chief economist, highlighted the contributing factors to the inflation increase, including higher tobacco and airfare prices, along with rising food costs.
Inflation indicates the price increase compared to the previous year. For instance, with 3% inflation, an item that cost £1 last year would now cost £1.03. It’s important to note that a decrease in inflation does not imply prices are stagnant but rather increasing at a slower rate. Deflation occurs when inflation falls below 0%.
The ONS calculates inflation based on a basket of goods and services that reflects consumer spending habits. The headline inflation figure represents an average, meaning individual prices may vary from this overall figure.
The Bank of England targets 2% inflation and has adjusted interest rates to manage inflation levels. Higher interest rates lead to reduced borrowing and spending, curbing demand and subsequently lowering prices to control inflation. The base rate, at 0.1% in December 2021, had previously peaked at 5.25% in August 2023 and has since been reduced to 3.75%.
In 2021, inflation began to climb, reaching a peak of 11.1% in October 2022, primarily due to escalating energy and food expenses. Energy demand surged post-Covid and worsened with the conflict in Ukraine, impacting food prices. In September 2024, inflation hit a three-year low at 1.7% but started to rise again in October 2024.