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Surprise inflation uptick to 4% could put base rate cut on ice

Surprise inflation uptick to 4% could put base rate cut on ice
Paloma Kubiak
Written By:
Paloma Kubiak

The Consumer Prices Index (CPI) measure of inflation rose by 4% in the year to December 2023, a surprise and “unwanted” increase from 3.9% in November, official statistics revealed.

This is the first increase since February 2023, and comes above market forecasts of 3.8%.

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% from 6.3% recorded in November, while the CPI goods annual rate slowed from 2% to 1.9%.

Core CPI which excludes the more volatile energy, food, alcohol and tobacco items also held steady at 5.1% 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% 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.

Bank of England base rate and mortgage borrowers

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.”


Ed Monk, associate director at Fidelity International, said: “For investors, today’s reading may slow down stock markets further. The progress of the past two months of 2023 has stalled in 2024 as investors take profits. Now the concern will be that price rises settle at a higher level and rate cuts take longer to come through. Cash savers should continue to see a real terms return on their money for now. They should understand, however, returns from risk assets like shares over the past year have far exceeded those from cash accounts.”

Sarah Coles, head of personal finance at Hargreaves Lansdown, said markets “don’t like surprises”.

“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.

Russ Mould, investment director at AJ Bell, added: “Worries about delays to interest rate cuts sent tremors across the UK market. Among the biggest fallers were stocks that lose out if interest rates stay high including housebuilders Persimmon and Barratt Developments, mortgage lenders NatWest and Lloyds, and tech-related names including Ocado and investment trust Scottish Mortgage.”


Adam Thrower, head of savings at Shawbrook, said: “Despite an unwanted rise in inflation, there are savings rates on offer that remain above inflation. However, our research shows that almost half (46%) of savers haven’t switched or opened a new account in the last 12 months. And even of the savers who say they have previously switched, almost a quarter (23%) did so more than 12 months ago. This means that many could be losing out on growing their savings. The high rates on savings won’t be that high forever, and as 2024 goes on inflation and similarly interest rates could still fall. Savers should be acting now as time could be running out to make the most of the higher rates currently available.”

Alice Haine, personal finance Analyst at DIY investment platform, Bestinvest, said the slight uptick in CPI inflation comes at a time when banks and building societies are also pulling the plug on the best deals.

But she added: “There’s still money to be made though, with top top-easy access rates of up to 5.2% and top fixed rates of up to 5.3%. With rates on fixed-rate savings accounts dropping the fastest, those with sizeable sums to stash away should bag a bumper return on their nest egg while they still can.

Pensions and annuities

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said the stubborn nature of inflation has hit everyone’s wallets, including pensioners, for whom April’s 8.5% state pension boost “cannot come quickly enough”.

She added that it will also be a factor for those looking to plan their retirement income.

“Those in drawdown may find they need to increase withdrawals to keep up with increases in their day-to-day costs, and those in the market for an annuity may look at an inflation-proofed product.

Annuity incomes have come off the highs we saw in the aftermath of the mini Budget, but still remain much higher than we have seen in recent years. A 65-year-old with £100,000 pension can currently get an income of up to £6,781. This is significantly higher than the £4,626 you could get back in January 2021.”