Shock UK inflation hike sees rate reach 11 month high

The increase cost of air travel, which jumped 46 per cent in December, its biggest rise for 13 years, offset falling food and clothing prices, according to the analysis by the Office for National Statistics.

The rate of 0.2 per cent, as measured by the Consumer Prices Index, was up from November’s 0.1 per cent, the ONS said.

The rise is higher than economists had expected but commentators were quick to temper ideas that the latest figures should be viewed as the beginning of a trend in an increasingly uncertain global economy.

Jonathan Thomas, senior economist for Lloyds Bank Commercial Banking, said: “While reassuring, today’s figures do not mean that inflation is now on a firm upward trend towards the Bank of England’s 2 per cent target. The recent relapse in oil prices, which have now fallen to levels not seen since 2003, and further signs of global economic weakness, especially from China, are likely to preclude a robust pickup in overall price growth. With these factors in mind, we continue to expect the headline rate of inflation to remain below 1 per cent until late in 2016.”

ONS analysts also pointed to the volatility of air fares, with December especially seen as a month for dramatic increases due to the Christmas holidays. The ONS said this latest jump was the highest since 2002 as it warned that air prices were “highly variable” and said a November-to-December increase of more than 40 per cent was not unusual.

Petrol prices, while lower than November, fell less than in the same period last year, so they also contributed to the rise in inflation, the ONS said.

This jump in transport costs was partially offset by a drop in alcohol, tobacco and food costs.

Monthly inflation has been between -0.1 per cent and 0.1 per cent for the past eleven months, helped by plunging commodity prices.

But house price inflation, which is not in the CPI index, continues to run far ahead of general inflation.

The ONS said UK house prices increased by 7.7 per cent in the year to November 2015, up from 7.0 per cent in the year to October 2015. The biggest rises were in the east of England.

Measured by the retail prices index, which is still used to set some train ticket prices and pension payments, and is calculated to include housing costs, inflation was 1.2 per cent in the year ending December 2015, up from from 1.1 per cent in November 2015.

ONS head of CPI James Tucker said: “Today’s small rise in CPI was mainly down to air fares and motor fuels, partially offset by falls in alcohol and food prices.”

“While this modest rise takes CPI to its highest level for 11 months, it is still at historically low levels.”

Last week, the Bank of England left interest rates unchanged at 0.5 per cent, with expectations growing that there will be no rise in base rate throughout 2016.

Analysts expect inflation to remain well below the Bank of England’s 2 per cent target for the rest of the year.