Inflation jumped to 3% in the year to January, the fastest rate for 10 months and higher than the 2.8% that analysts had expected.

The rise in prices from 2.5% in December was driven mostly by higher energy costs, air fares and VAT on private school fees.

The chief economist of the Office for National Statistics, Grant Fitzner, said: “The rise was driven by air fares not falling as much as we usually see at this time of year, partly impacted by the timing of flights over Christmas and New Year.

“This was the weakest January dip since 2020.

“After falling this time last year, the cost of food and non-alcoholic drinks increased, particularly meat, bread and cereals.

“Private school fees were another factor, as new VAT rules meant prices rose nearly 13% this month.”

In October, the Office for Budget Responsibility (OBR), said that the October Budget would increase inflation, partly because some of the rise in employer national insurance contributions would be passed on to consumers in the form of higher prices.

The Bank of England is forecasting that inflation could be around 3.7%by the third quarter of 2025.

Bank of England governor Andrew Bailey and his colleagues say a slowdown in the jobs market is likely to keep a lid on higher wage demands this year after an acceleration in late 2024, limiting the risk of a build-up of inflation pressure.

Nicholas Hyett, Investment Manager at Wealth Club said: “If there was any doubt about what the Bank of England would do at its March interest rate meeting there isn’t now. Headline inflation has jumped significanlty, and came in some way ahead of market expectations.

“With Core inflation nearly twice the Bank of England’s target we see little chance the Bank starts cutting rates again any time soon.”

Martin Sartorius, principal economist at the CBI, said:  “The stronger-than-expected rise in inflation in January highlights the challenges facing the Monetary Policy Committee as they seek to rein in persistent price pressures. Higher energy prices, strong wage growth, and the impact of Autumn Budget measures are likely to keep inflation above target this year. 

“While we still expect a gradual, quarterly pace of rate cuts throughout 2025, this inflation surprise raises the possibility that the MPC might tread even more carefully as it looks to reduce borrowing costs.” 

Only three industries out of the 18 that make up the UK private sector economy registered productivity gains in the three months to September last year. Data from the Office for National Statistics shows the transport, mining and administration services industries registered productivity increases on an annual basis, though they are relatively small contributors to gross domestic product.

Retailers registered the sharpest fall in productivity, down by 5.4%, followed by energy, down 4.2%, and health, which slid by 4.1%.

Stock markets and company updates

BAE Systems has said its order book hit a record last year days after speculation of hiked security spending in Europe sent the defence firm’s shares rallying.

Some £33.7 billion worth of orders were secured in the year to 31 December, leaving its backlog at a record £77.8bn. Sales climbed by 14% to £28.3bn, pushing underlying pre-tax earnings up 14% to £3bn.

BAE has benefitted from growing demand on the back of heightened geopolitical tensions with the likes of the Ukraine war in recent years.

HSBC has today posted annual profit that beat estimates, helped by increased revenue in wealth and markets businesses, and set stiff cost-cut targets as its new CEO implements a revamp of the Asia-focused bank to boost returns.

The Asia-focused lender also announced it is targeting savings of $1.5bn (£1.2bn) by the end of 2026 and a new $2bn share buyback which it plans to complete before its next earnings.

It reported profit before tax for 2024 of $32.3bn, as income withstood the impact of falling interest rates. That compared with $30.3 billion a year earlier and the $31.7bn average of analyst estimates compiled by the bank.

Glasgow-based Beeks Financial Cloud, which provides connectivity for financial markets, said this morning that trading in the first half has been in line with board expectations, with revenues expected to increase 22% to £15.8m and underlying profit before tax to increase 31% to £1.8m.

Beeks has achieved a positive free cash flow position in the period and the group secured a further extension to the Johannesburg Stock Exchange contract and, post-period end, a major new win with Grupo Bolsa Mexicana de Valores, the second-largest exchange in Latin America.

The board continues to be confident in achieving results for FY25 in line with its expectations, underpinned by a robust business model and increasing exchange cloud momentum

Overnight report

Shares in London’s top listed companies edged lower yesterday as investors digested the latest UK employment figures and monitored US-Russia peace talks.

UK wage growth accelerated in the three months to December, while the unemployment rate remained steady, according to fresh data from the Office for National Statistics (ONS).

The FTSE 100 closed just 1.28 points lower at 8,766.73.

John Wood Group surged 12.44%, rebounding from sharp losses that followed Friday’s weak trading update.

Assura rose 2.31% after rejecting a £1.6bn takeover bid from US-based private equity firm KKR.

BT Group fell 2.9% after Citi downgraded the stock to ‘sell’ from ‘buy,’ citing revenue pressures at its Openreach unit.

InterContinental Hotels Group fell 4.56% despite reporting higher full-year profits, increasing its dividend, announcing a $900m share buyback, and acquiring the Ruby brand for €110.5m.

Sterling was last down 0.19% on the dollar to trade at $1.2601, while it gained 0.18% against the euro, changing hands at €1.2065.

A late-afternoon rally pushed US stock markets into positive territory, helping the S&P 500 rise to a new record closing high.

An increase in risk appetite in the final hour of trade saw the Dow Jones and Nasdaq eke out a 0.02% and 0.07% gain, respectively, while the S&P 500 rose 0.24% to a new peak, topping an earlier record close on 23 January.

Nevertheless, the mood was still cautious as investors continue to digest Donald Trump’s plans for “reciprocal tariffs” on a number of America’s biggest trading partners.