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Inflation rose for the first time in nearly a year last month, surprising economists who had predicted it would continue falling
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But how did this happen? According to figures from the Office for National Statistics, inflation came in at 4% in December, up from 3.9% in the month before
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Experts thought that it would have fallen to 3.8%. The increase was driven by higher alcohol and tobacco prices, reflecting new taxes put on those products in November's autumn statement
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Most concerningly for the Bank of England, however, services inflation rose to 6
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0.4% from 6.3% the month before. The bank has identified services inflation as a key gauge of
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domestic inflationary pressures, and it's therefore crucial for understanding how it's going to
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respond. So how concerned should we be? Really, these figures do little to change the main narrative
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which emerged over the last quarter of 2023. Inflation has fallen much faster than both markets
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and the Bank of England ever would have expected. In its most recent round of forecasts made in November
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The bank predicted that inflation would only have reached 4 by this point So even including December slight increase inflation has fallen much faster than the bank expected And although the next round of figures for January might show a slight increase
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most economists think that inflation will continue falling fast in the first quarter of this year
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Martin Beck, chief economic advisor to the EY Item Club, said that further falls in wholesale gas prices suggest that household energy bills would fall by close to 15% in April
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when the off-gem energy price cap is recalculated. Yale Selfin, chief economist at KPMG, agreed, saying the expected fall in the energy price
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cap in April could see inflation returning to target by spring. This would put the bank in a position to start cutting interest rates from the second half of
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the year. What today's figures make very unlikely is any imminent cut to interest rates
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Following the figures, markets push back the timing of the first rate cut from May to June
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The Bank of England is likely to view the figures as justifying its own caution with regards
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to cutting interest rates. It so far has said it's too early to consider cutting rates, but we'll have to wait until February 1st to get more details on their view
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We here at City AM would like to know. Are you worried about the rise in inflation
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Let us know in the comments below