Data released today by the ONS has stated that headline inflation in the UK is at 4.0%, a slight uptick from 3.9% in November, and against market expectations of CPI falling to around the 3.7% mark.

This may be enough to dampen the idea of the MPC cutting rates in February, but in my opinion it shouldn’t. Notwithstanding that the inflation we are experiencing is not demand-pull but instead supply driven inflation, and therefore tackling it with demand side policy will have limited efficacy.

But looking further into the data, we can see that the slight rise came mostly from the services sector. Within this sector, the rise in services inflation was driven by a prodigious rise of 57.1% in airfares in December. In addition, CPI is still trending far below the BoE expectations, around 0.6ppts below, so really, the latest CPI data should not be cause for too much concern.

If we also look at goods, the largest upward contribution to the monthly change in both CPIH and CPI annual rates came from alcohol and tobacco while the largest downward contribution came from food and non-alcoholic beverages. – Probably more important to the average person.

Why the rise?

The increase in the annual rate was largely the result of the increase in tobacco duty, after the government announced higher taxes in their autumn statement. Therefore an argument could be put forward that, the rise in prices is not the result of purely economic inflationary pressures but also government policy.

In conclusion, CPI is still well below the BoEs expectations, alcohol and tobacco duty price increases led to the slight increase of CPI, food inflation continues to fall, with drops in prices in items such as fish and yoghurt, driven by lower production and energy costs. That being said, it is likely that Jan and maybe Feb figures will see another slight uptick to around 4.1%, but with big falls coming in the months following.