Surprise inflation rise dents hopes of early rate cut
Stocks fell sharply after UK inflation defied forecasts by rising to 4% in December and weakening the chances of an early interest rate cut.
Economists had forecast a fall to 3.8% from 3.9% in November and the surprise uplift in the consumer price index (CPI) measure of inflation is the first since February last year.
The US experienced a similar unexpected rise in December, showing that the battle with rising prices is not yet won.
January’s figure is also likely to rise because of the hike in the Ofgem energy price cap.
However, economists forecast further drops, with one recently suggesting it could be down to the Bank of England’s 2% target by April.
Chancellor Jeremy Hunt said: “As we have seen in the US, France and Germany, inflation does not fall in a straight line, but our plan is working and we should stick to it.
“We took difficult decisions to control borrowing and are now turning a corner, so we need to stay the course we have set out, including boosting growth with more competitive tax levels.”
Traders and analysts marked prices down after the latest figures and said prospects for rate cut could be on hold.
James Smith at ING said:” “After an unexpected pick-up in UK inflation, the market may be getting ahead of itself by pricing a May rate cut.”
Ebury’s Matthew Ryan commented: “This morning’s UK CPI data reinforces our suspicions that the ‘final mile’ in the Bank of England’s inflation fight will be the toughest, and that the path towards the 2% target will be anything but plain sailing.”
The Bank of England will make its next interest rate decision on 1 February following the European Central Bank on 25 January and the US Federal Reserve on 31 January.
The FTSE 100 index of leading shares closed 112.05 points (1.48%) lower at 7,446.29 as a result of fading optimism about early interest rate cuts, combined with disappointing economic data from China.
Housebuilders were the casualties of the change in interest rate sentiment. Persimmon closed down 73p, or 5% at 1395.5p.
Miners were also punished, with Glencore, also hit by a downgrade from Deutsche Bank, fell 19.75p, or 4.5%, to 419.5p.