Monthly Rise in CPI Likely Reflective of ‘Noise’

Main points

• Annual consumer price inflation was 4.0 per cent in December, rising from 3.9 per cent in November, and marking the first time the rate has increased since February 2023. This figure reflects price increases in alcoholic beverages and tobacco, as well as categories such as clothing and footwear, which were partially offset by price decreases in food and non-alcoholic beverages. However, food, alcohol and tobacco are items that often see volatile price movements; thus, it is likely that this slight rise is more reflective of ‘noise’ rather than a genuine signal of a change in the declining trend of inflation.
• NIESR’s measure of underlying inflation, which excludes 5 per cent of the highest and lowest price changes to eliminate volatility and separate the signal from the ‘noise’, fell to 5.5 per cent in December from 5.7 per cent in November. At the same time, core CPI remained unchanged at 5.1 per cent in December. These measures can be taken as further evidence that, though underlying inflationary pressures remain elevated (above the headline rate), today’s upward surprise in headline inflation is reflective of volatile, but transient, price movements that should not affect the path of interest rates.
• Food inflation fell to an annual rate of 8.0 per cent, down from 9.2 per in November. However, the fact that it remains so elevated is concerning since there is no government support to help households (especially lower income households, who spend a greater part of their incomes on food) offset this cost.

“Today’s data indicate that annual CPI inflation was 4.0 per cent in December, rising marginally from 3.9 per cent in November, driven by price increases in alcoholic beverages and tobacco, as well as categories such as clothing and footwear, which were partially offset by price decreases in food and non-alcoholic beverages. Given that the largest contributors to movements in the annual rate of CPI inflation were highly volatile items (alcohol, tobacco and food), it is likely that this slight rise is more reflective of ‘noise’ rather than a genuine signal of a change in the declining trend of inflation. Indeed, when we exclude volatile items from the CPI calculation, we see that core inflation (CPI inflation excluding food, alcohol, energy and tobacco), remained unchanged at 5.1 per cent in December, while NIESR’s trimmed-mean measure (which excludes the 5 per cent most volatile price movements on either end of the distribution) fell from 5.7 per cent in November to 5.5 per cent in December. That said, with services inflation rising slightly from 6.3 per cent in November to 6.4 per cent in December, as well as the possibly inflationary effects of recent geopolitical events, there is a risk that inflationary pressures may rise further in the coming months.”

Paula Bejarano Carbo
Associate Economist, NIESR

For a breakdown of what inflation is and how it is calculated, read our blog post here.