Inflation in the UK has risen more than expected at the beginning of the year, adding further strain to the economic landscape and complicating the path ahead for monetary policy. The latest figures from the Office for National Statistics (ONS) reveal that the headline rate of inflation climbed to 3.0% in January, up from 2.5% in December. This increase exceeded the 2.8% anticipated by financial markets, reinforcing concerns that inflationary pressures remain stubbornly entrenched.
Grant Fitzner, chief economist at the ONS, noted that inflation had risen sharply to its highest annual rate since March last year, underscoring the persistence of price pressures across the economy. A key driver of this rise was services inflation, a crucial indicator of domestic pricing trends, which jumped to 5.0% from 4.2% in December. While this figure fell just below the Bank of England’s expectations, it signals underlying pressures that could make it harder for policymakers to justify aggressive interest rate cuts.
Core inflation, which strips out more volatile components such as food and energy, also ticked upwards to 3.7% from 3.2%. Though this aligned with market forecasts, it adds to the broader picture of inflationary resilience. The unexpected strength of price growth has caught many by surprise, with analysts highlighting that the trajectory of inflation remains more unpredictable than previously assumed. Ruth Gregory, deputy chief UK economist at Capital Economics, described the increase in the Consumer Prices Index (CPI) as larger than expected, reinforcing the challenges facing policymakers.
A major contributor to the rise was airfares, which typically decline in January following a seasonal increase in December. However, the fall was notably less pronounced this year, largely due to the timing of data collection. Prices were lower than usual in December, as key dates for measurement coincided with Christmas Eve and New Year’s Eve—days when demand is typically subdued. As a result, while airfares did decrease in January, the decline was far smaller than in previous years, falling by just 19.0% compared to a drop of 38.9% a year earlier.
Additional cost pressures also emerged, including the introduction of VAT on private school fees, which caused education costs to surge by 13% in a single month. Meanwhile, food prices, particularly for meat, bread, and cereals, rose at a faster pace than at the same time last year.
Despite the uptick in inflation, Bank of England Governor Andrew Bailey downplayed concerns, stating that the anticipated rise was not “a story about the fundamental state of the economy” but rather a reflection of external factors. He also expressed confidence that inflationary pressures, particularly in services and wage growth, would continue to ease throughout the year, allowing for further interest rate cuts.
The latest figures add to concerns about inflation’s trajectory, especially in light of recent data indicating an acceleration in wage growth. The final quarter of 2024 saw regular private sector pay climb to its highest level since November 2023, exacerbating inflationary risks and making the Bank of England’s task more complex. With inflation proving more persistent than hoped, expectations of rapid interest rate cuts are beginning to fade.
Market reaction has been swift, with analysts suggesting the Bank of England may be forced to adopt a more cautious stance in its monetary policy decisions. Zara Noakes, global market analyst at JP Morgan Asset Management, warned that the data would set off “alarm bells” at the Bank of England, likely forcing policymakers to proceed with rate cuts at a slower pace than investors had anticipated.
However, not all economists view the situation in the same way. Independent economist Julian Jessop noted that, at 3.0%, inflation remains “tolerably low,” suggesting that while inflationary pressures persist, they are far from the extreme levels seen in recent years.
While inflation may have retreated from its 2022 highs, it remains a formidable challenge, shaping decisions that will affect financial markets, business confidence, and economic growth in the months ahead.
(Source: CITY AM)