This is the first increase in inflation since February 2023, and comes above market forecasts of 3.8 per cent.
According to the Office for National Statistics (ONS), alcohol and tobacco dragged the figure upwards, following the increase in duties confirmed in the Autumn Statement 2023. Transport, recreation and culture also contributed to the rise in the headline rate.
Meanwhile, the largest downward contribution came from restaurants and hotels, along with food and non-alcoholic beverages.
The ONS revealed that services inflation also nudged up to 6.4 per cent from 6.3 per cent recorded in November, while the CPI goods annual rate slowed from 2 per cent to 1.9 per cent.
Core CPI which excludes the more volatile energy, food, alcohol and tobacco items also held steady at 5.1 per cent in the 12 months to December 2023.
Turning to the Consumer Prices Index including owner occupiers’ housing costs (CPIH) – the ONS’ lead measure of inflation – this rose by 4.2 per cent in the year to December 2023. It was the same rate as in November.
Overall, industry experts and forecasters suggest the slight uptick in inflation and the ‘sticky’ core inflation figures could have wide-reaching impacts for the Bank of England base rate and mortgage borrowers, savers, investors and pension holders.
Inflation unlikely ‘to fall in a straight line’
Ben Thompson, deputy CEO, Mortgage Advice Bureau, said “inflation was always unlikely to fall in a straight line in 2024”.
He added: “However, the concern now is if inflation doesn’t start to come down again soon, we might have to wait a little longer for the first base rate cut from the Bank of England.”
There was renewed optimism at the start of the year as industry experts predicted inflation to fall to its 2% target by spring 2024, while others forecast two Bank of England base rate cuts in the year.
Meanwhile, a spate of mortgage rate cuts buoyed first-time buyer hopes and relief for the 1.5 million mortgage borrowers whose fixed-rate deals are coming to an end this year. However, now, fears have been raised the inflation figure could put an end to the mortgage rate cut war.
Thompson added: “This has been welcome news for those looking to remortgage or get onto the housing ladder, and we hope that today’s slight increase won’t be the start of an upward trend.”
James McManus, chief investment officer at digital wealth manager, Nutmeg, said: “Services inflation remains front of mind for the Bank of England ahead of the next interest rate decision at the start of February. It’s a large element of core inflation and therefore key to helping the slowdown in price rises. For the Bank of England to be comfortable cutting interest rates – which in turn will bring down mortgage rates and potentially put more money into people’s pockets – it will want to see services inflation as well as headline inflation ease. So it might be too early for a rate cut in February, but expectation is the first half of the year.”
Sarah Coles, head of personal finance at Hargreaves Lansdown, added: “It’s a salient reminder that inflation is likely to trend downwards from here, but not particularly fast, and with plenty of bumps along the way
