Kevin Peachey
Cost of living correspondent

Policymakers may be pondering that the route to the 2% inflation target never did run smooth.

There’s already lots of chat about how big a bump in the road towards lower interest rates and borrowing costs this is.

But it is worth considering what these latest figures tell us. It was already pretty expensive to be a smoker and drinker. They’ve seen comparatively big price rises over the last year.

Also the purchasing power of your money is still being affected by rising prices in general, as it has since the pandemic.

January is never a bad time to review your finances, for unnecessary spending and so on, and it makes even more sense now.

Take a look at our inflation rate calculator here to see how much prices are rising for you.

It was tobacco, rather than alcohol, that was the biggest driver of inflation in December, according to the Office for National Statistics (ONS). This is because the Chancellor raised duty on tobacco products in the Autumn Statement last November.

In total - the ONS groups alcohol and tobacco together - prices rose by 12.8%.

But tobacco was the fuel behind that increase after prices grew by 16% in the year to December.

Looking at prices on a monthly basis, tobacco increased by 1.2% between November and December, but alcohol dropped by 1.6%.

That's probably helped by the fact that in the same Autumn Statement, Jeremy Hunt froze duty on beer, wine, cider and spirits until this coming August.

Image source, PA Media

Labour's shadow chancellor Rachel Reeves says "any rise in inflation is bad news for families who are worse off after fourteen years of economic failure".

In a statement, she goes on to note that prices are still going up in the shops.

Reeves adds this is set to leave the average family worse off under prime minister Rishi Sunak's tax plan.

"Britain cannot afford another five years of economic failure. Only Labour can deliver the change Britain needs and make working people better off," she says.

Dharshini David
Chief economics correspondent

In recent weeks, there’s been a growing expectation that the next move in interest rates will be down - and this continues.

First, because December’s rise is tiny compared to the decline in inflation overall over 2023; that has been more rapid than the Bank of England expected.

Second, the factors behind December’s rise largely either reflect policy (tobacco duty) or the more volatile, transitory factors (more expensive theatre tickets or DVD releases).

And third, crucially, it takes time – up to two years – for rate changes to impact inflation. And looking ahead, the domestic energy price cap could drop by perhaps 15% on April, due to wholesale prices – and inflation of non-essentials is expected to slow as previous rate rises curb consumer spending.

Most economists hadn’t been expecting rates to start falling until closer to the summer, until the Bank was confident inflation was under control. Most are still looking for a cut around June, although some are pencilling in fewer cuts – four perhaps rather than five – this year.

“It doesn’t mean inflation has fallen, it just means it’s slowed,” says Nicola Headlam, an independent economic advisor.

Speaking to BBC 5 Live Breakfast, Headlam explains what the latest figures mean: “Stuff is still 4% more expensive than it might have been and twice as expensive as the bank’s target of 2% inflation.”

She says that people who are paying a mortgage from their wages are still facing a tough economy.

“As we know, the people most exposed are people tracking the base rate. Base rate at the end of 2022 was 0.1 and it’s now 5.25 so a completely different scenario for borrowing,” Headlam says.

For the people who are coming off a fixed rate mortgage, that is fuelling the whole cost of living crisis for them, according to Headham.

“There’s a lack of disposable income in that big group of people,” she says and adds: “The market always moves a bit ahead of reality.”

Kevin Peachey
Cost of living correspondent

Today we’ve had the latest official inflation figures for the UK, but ultimately, the rising cost of living can be different for everyone.

Individuals have their own inflation rate, depending on what they buy and the services they use.

One of the big issues of the last two years is that the cost of necessities – primarily heating and eating – have been driving price increases.

For those on lower incomes, and some vulnerable people, this takes up a bigger chunk of their income and so hits them harder.

Use our inflation calculator to find out how much prices are rising for you.

Included in the monthly inflation figures is something called "core" inflation. This strips out volatile items such as energy, food, alcohol and tobacco and is a figure that the Bank of England looks at when it is deciding whether to raise, cut or hold interest rates.

The latest data shows that core inflation remained at 5.1% in December, the same as November.

As our chief economics correspondent Dharshini David mentioned in an earlier post, the core measure is relatively high but is easing - and that's the key thing when it comes to the likelihood of an interest rate this year.

Michael Saunders, a former member of the Bank of England’s Monetary Policy Committee, says inflation rates fell “really sharply” in previous months, so even with the slight uptick in the latest figures "the big picture is that inflation is falling more sharply overall than what the Bank of England expected a few months ago".

Speaking to the BBC’s Today programme, Saunders says that in November, the forecast was 4.5%, so 4% is lower than that.

When asked what would be the conversation at the Bank of England on interest rates, Saunders says that he believes the rates will possibly come down later this year.

“When they come down, I don’t think they will come down quickly, but I’d expect them to come down gradually, perhaps starting from the middle of the year.”

Now working as a senior advisor at Oxford Economics, Saunders predicts inflation will go down to the 2% target in the second quarter of the year.

“The question for the Bank of England is whether it will stay down,” he adds.

The chief economist from the Office for National Statistics (ONS) has just spoken to the BBC's Today programme, to offer a bit more context about today's announcement.

Grant Fitzner confirms the key factor causing the shock rise in inflation was tobacco prices, but cautions the UK is not alone in seeing the rate of price rises go up in December.

He notes that France, Germany and the US have experienced similar inflation upticks.

Fitzner says while the general pattern of inflation numbers is a clear downwards trend, he emphasises this is not a "smooth linear path" to a lower headline inflation rate.

Looking for some positives in the data, he says a good sign is that the annual rate of food cost rises continues to fall - driven by lower costs for production and energy feeding through to shelf prices.

Noting the last few financial quarters have seen overall very large falls in inflation, Fitzner explains getting the rate down to the Bank of England's 2% target is more challenging.

This is because it would need core inflation to fall, explaining this as a measure strips out more volatile goods like energy and tobacco costs and is therefore less subject to large changes.

Dharshini David
Chief economics correspondent

Higher tobacco duty and more expensive theatre tickets contributed to a tick up in inflation in December.

But the rate still more than halved over 2023 and has undershot the Bank of England’s expectations.

Where next? At the very start of 2024, economists think that decline may have stalled further due to what was happening a year previously.

Beyond that, some analysts reckon, the same factors that triggered the initial spike - energy and food costs – may allow it to decline rapidly to dip below the Bank of England 2% target during the spring.

That could mean inflation in the UK undercuts the US and the eurozone for the first time in two years.

Whether it stays low depends on what happens to other prices, largely those non-essentials. Core inflation remains relatively high but is easing.

So some economists predict interest rates could fall by June, and drop several times this year.

The uptick in inflation - which measures the rate at which prices are rising - is unexpected but, as this graph shows, it is far below the highs reached in October 2022.

At that point, inflation hit the highest level for 40 years when it reached 11.1%.

So while the December figure is far better than that, the fact that it has edged up instead of down now means it is further away from the Bank of England's 2% inflation target.

There has been hopes that the Bank would start cutting interest rates in spring. Now? Who knows.

Image source, PA Media

We've just heard from the Chancellor. Responding to the surprise rise in inflation, Jeremy Hunt says the rate of price rises does not fall in a straight line.

He insists, despite the rise in inflation, the government's "plan is working and we should stick to it".

In a statement, Hunt says: "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."

Image source, PA Media

It is safe to say the rise in inflation in December is a big shock to economists. It was widely forecast to fall further to 3.7%.

So what is to blame? Cigarettes and booze, according to the Office for National Statistics.

It says that tobacco and alcohol had the biggest impact on prices rises.

We will bring you more as we delve deeper into the figures.

UK inflation rose to 4% in the year to December, official figures show.

That is a rise from 3.9% in November and far higher than economists expected.

Kevin Peachey
Cost of living correspondent

A consistently falling inflation rate - if that comes to pass - will bring some relief to those looking at their finances with worry.

But, remember, this is not the end of high prices, it just means the rate at which prices are rising has slowed.

So the pressure is still on, especially at the start of the year. This is often the time people take stock of their finances. The festive spending bills are coming in. It is cold and dark. Energy prices have just gone up - meaning prepayment credit isn’t lasting as long, and suppliers may have put direct debits up.

A survey for debt charity StepChange suggested two in five people expected their financial situation to worsen this year. It is clear that the cost of living remains a huge concern for millions of people.

If you are worried, there are various guides available on the cost of living pages of the BBC News website, and debt charities can offer free help if you are struggling.

The inflation figure is presented as a percentage. It tells us how fast prices for goods and services are rising in the UK.

Inflation dropped to 3.9% in the year to November, down from 4.6% the month before - a big factor in the drop was a fall in petrol and diesel prices.

It had been as high as 11.1% in October 2022. The recent drop doesn’t mean that prices are dropping - just that they’re rising less fast than before.

Image source, .

Kevin Peachey
Cost of living correspondent

Image source, Getty Images

Forecasts for the future direction of inflation, and - in turn - interest rates, are key for the way mortgages are priced right now.

Rates on new fixed deals have dropped quite sharply in the first weeks of the year, taking the rate on an average two-year deal down to about one percentage point lower than last summer’s peak.

This is because lenders’ funding costs have dropped, which is the result of analysts expecting a few interest rate cuts during the year.

There is a flipside, of course, and that’s the possibility that the interest being offered to savers may now have peaked.

Image source, Getty Images

Inflation measures how quickly prices are rising (or very occasionally falling) for goods and services.

A series of recent shocks to the economy has caused high inflation, the Bank of England says.

First, the Covid pandemic pushed prices up as more people bought goods - but there were problems getting enough of the goods, particularly with importing them from abroad.

Second, the war in Ukraine led to large increases in the price of gas and food.

Then, a big fall in the number of people available to work meant employers began offering higher wages to job applicants, with many businesses increasing their prices to cover these costs.

• Read more here

As we've just mentioned, economists believe there’ll be a drop in UK inflation, from 3.9% to 3.7% - let’s take a closer look at that.

Both Deutsche Bank and Bloomberg released forecasts yesterday, in which they said just that.

In a five-page document, the Deutsche Bank said today's figure could "see inflation continuing its downtrend into year-end".

"We expect the headline rate to slow to 3.77% [year-on-year]," the bank added.

The "continuing downtrend" the bank mentions is a reference to last month’s figures, which fell more than they were expected to (from 4.6% to 3.9%) and saw UK inflation reach its lowest rate for more than two years.

But as last month's figures show, these rates are difficult to predict and anything can happen - be it good news or not.

James Harness
Live reporter

Hello and thanks for joining us as we prepare to see the latest figures showing the rate of inflation in the UK.

Inflation measures the pace at which prices are rising, and it’s been slowing down in the UK since record highs towards the end of last year.

The number we’ll get at 07:00 GMT will tell us the UK's inflation rate in the year to December 2023 - economists are predicting it could dip slightly to around 3.7%, from 3.9%.

As soon as the infaltion number drops, we’ll let you know. Stick around for that, as well as the latest analysis.