Rising prices for clothing, transport and cultural activities pushed UK inflation higher last month, as soaring coronavirus infection rates set the stage for months of restrictions on parts of the economy.
The price of goods in the UK as measured by the consumer price index rose at an annual rate of 0.6 per cent in December, up from 0.3 per cent the previous month, the Office for National Statistics said on Wednesday.
Economists were divided over the extent to which the move signalled the beginning of a rise in inflation, to take the rate closer to the Bank of England’s 2 per cent target after it dropped significantly as a result of lockdown and government measures to stimulate the economy last year.
Recreational and cultural activities were the biggest drivers of December’s rise in inflation and prices for transport and clothing also increased. These were partially offset by falls in the cost of food and non-alcoholic drinks.
Inflation was slightly higher than the 0.5 per cent consensus expected by economists. Core inflation, excluding volatile prices such as alcohol and fuel, also rose to 1.4 per cent from 1.1 per cent in November.
Thomas Pugh, UK economist at the consultancy Capital Economics, said inflation would be likely to rise more sharply after April, when a value added tax cut for the hospitality sector was lifted and increases in energy prices would probably be felt.
“Together these forces could lift inflation to more than 2 per cent by the end of the year. But ample spare capacity means it will probably settle at close to 1.5 per cent by the end of next year,” he said.
However, Samuel Tombs, the chief UK economist for Pantheon Macroeconomics, also a consultancy, said the risk of consumer price index inflation “sustainably exceeding the 2 per cent target” this year or in 2022 seemed low. “Any post-pandemic consumer rotation towards spending more on services will come at the expense of weaker demand for goods, in turn pushing down core goods inflation,” he said.
After falling gradually for two years, UK inflation fell further during lockdown and dropped to a four-year low of 0.2 per cent in August after the government’s Eat Out to Help Out scheme and a cut to VAT.
December’s increase reflected further turbulence during what was a bumpy Christmas period for many businesses in the UK.
Although restrictions imposed in November were eased at the beginning of the month, retailers, bars and restaurants were further disrupted after the rapid spread of the virus forced Prime Minister Boris Johnson to tear up plans for festive “bubbles” and impose tighter restrictions.
Howard Archer, chief economic adviser to EY Item Club, said low levels of inflation were “supportive to consumers’ purchasing power” amid rising unemployment and the prospect of limited pay increases”.
He said rates were unlikely to rise far beyond the Bank of England’s target in the next year. “Price conscious consumers, excess capacity, limited earnings and curtailed economic activity are likely to limit inflation in the near term at least,” he said.