ALEX BRUMMER: How worried should we be about a return of inflation – and what does this mean for interest rates and your shopping basket?

There is no reason to worry. The small price increase of up to 4 percent in the year to December does not mean the cost of living crisis is back.

On the contrary, the trend is towards lower inflation and tremendous progress has been made since the main consumer price index peaked at 11.1 percent in October 2022.

The danger is that as a result of this small increase, rate-setters at the Bank of England – already bruised from allowing inflation to get so out of control in the first place – will delay the official bank’s hoped-for cut. from the current 5.25 percent. The markets were already betting on a cut in May, but that could now be postponed.

The slight increase in inflation from 3.9 percent in November to 4 percent, which is still twice the Bank of England’s target, is largely due to exceptional factors – most notably an increase in tobacco duties. That shouldn’t have much impact on most people’s shopping carts.

Nevertheless, a further increase in the index could occur this month due to a 5 percent increase in the energy price ceiling.

After that, barring unexpected mishaps, there is little reason the consumer price index won’t reach its 2 percent target by the summer. One City analyst firm, ING, even predicts the target could be achieved as early as April.

Lower inflation and lower interest charges on government bonds could now give Chancellor Jeremy Hunt the financial space to deliver some high-profile tax cuts, seen as the best way to reverse the Tories’ woeful political poll numbers.

Of course, events can intervene. The biggest risk to global prices right now is the brutal attacks by Iran-backed Houthi rebels on ships off the coast of Yemen in the Red Sea. This drives up the cost of shipping goods from Asia to Western European markets, as goods are diverted from Houthi missiles through the Cape of Good Hope and around Africa.

The uncertainty this has caused has also pushed up the price of crude oil on international markets, which rose above $80 a barrel this week. It is already affecting the price of fuel at the pumps.

However, there are no real shortages in energy supplies, as was the case when Russia invaded Ukraine in February 2022, and oil prices are showing signs of falling again due to the weakness of the Chinese economy.

So far, inflation in Britain has been stubbornly higher than in the US and Europe due to wage costs, as public sector unions demand higher wages and employers feel forced to boost workers’ earnings.

But earlier this week the Office for National Statistics reported that annual wage growth is well above peak levels at 6.5 percent and that the labor market is weakening.

Andrew Bailey, governor of the Bank of England, is particularly concerned that Britain is facing a wage price spiral, but that concern is now much less evident.

The increase in tobacco taxes has contributed to the rise in inflation, which rose to 4 percent from 3.9 percent in November

The increase in tobacco taxes has contributed to the rise in inflation, which rose to 4 percent from 3.9 percent in November

There are also signs that the cost of services – the largest sector of the UK economy, covering everything from haircuts to computers and financial advice – has remained stable. The latest data shows only the smallest increase in the cost of services, from 6.3 percent in November to 6.4 percent last month. Even more encouraging, the price of non-industrial goods fell from 3.3 to 3.1 percent.

There is also good news about the cost of raw materials used by businesses, which continues to be on a downward path – although the Red Sea crisis could change this.

The bottom line for most Britons is that wages are well outpacing inflation and consumer prices and interest rates should fall over the year. Competition between mortgage providers has already resulted in five-year fixed-rate loans falling below 4 percent.

Barring incidents, the British deception of inflation and devastating mortgage costs is, at least for the foreseeable future, a thing of the past.