December inflation blip highlights uneven road to price stability

Commenting, Charlotte Kennedy, Chartered Financial Planner at Rathbones, said: "The latest inflation reading underlines that the path back to the 2% target has been uneven. December’s higher-than-expected figure was driven by rising tobacco prices and airfares, partially offset by falls in other areas of household expenditure, leaving inflation on a broadly downward but bumpy trajectory.

"The recent rise is likely to be a temporary blip following several months of easing inflation since September. A range of cost-of-living measures - including energy bill relief, transport fare freezes and a cap on NHS prescription charges in England - should apply downward pressure on prices in the months ahead. Even so, the data complicates the case for an interest rate cut at the start of February.

"This creates a clear policy tension. While sticky inflation argues for caution, a softening labour market and further deceleration in wage growth strengthen the case for rate cuts later in the year, giving more dovish members of the Monetary Policy Committee greater scope to push for easing.

"It is also worth remembering that inflation is calculated using a representative basket of goods and services, covering both everyday essentials and newer and novel items added last year, such as VR headsets and men’s pool sliders. Because this basket reflects an average household, individual experiences of inflation can vary significantly depending on whether spending is weighted more towards energy, travel, food or discretionary items.

"While headline inflation guides monetary policy, it rarely captures the full picture of how price pressures are felt across the economy."