We have the latest inflation data from the United Kingdom, and it is not painting a good picture of the economy. According to the available data, the CPI for the month of December was 10.5%. This comes at a time when consumers spend more due to the holiday season despite the high cost of living.
According to the data from National Statistics Office, there was a 0.4% increase in the CPI for the month. As a result of this increase, the yearly inflation rate in the United Kingdom is now 10.5% instead of 10.7%. For most economists, this inflation data was similar to their own findings, so there's no surprise for the markets.
Underlying Inflation Is Still Strong
The recent readings have revealed that the inflation reading saw a little drop due to the decrease in fuel prices. In other words, the actual inflation is still strong in the United Kingdom.
Core CPI doesn't include the fact that food and fuel prices increased by 0.5% for the month after gaining 0.3% in November. This means that the core inflation on an annual basis is somewhere around 6.3%.
However, let's not forget that the Bank of England had set an inflation target of 2%. So a reading of 6.3% is still three times higher than the central bank's target.
This inflation reading comes at a time when there are reports that supermarkets in the UK have seen a healthy increase in sales during the holiday season.
The biggest increase was witnessed in grocery sales, which were up by 12% from the last year. This is an indication that people used the discounts from the holiday season to stock up on groceries.
When we combine the inflation data with the strong labor market in the UK, it reveals that wages are also rising at a fast pace. In fact, such a fast pace was not seen in the last 20 years if we exclude the pandemic years.
Over all, the current situation has made it difficult for the Bank of England to slow down its rate hike cycle.