Inflation rose unexpectedly to 4% last month, its first rise in almost a year, which dented hopes of an early cut in interest rates by the Bank of England.
Consumer prices ticked up to 4% in the year to December, from 3.9% the month before, driven by rises in alcohol and tobacco, data from the Office of National Statistics shows.
It is the first pick-up in inflation since last February, when it hit 10.4%.
Core inflation, which includes mortgage costs, but strips out volatile food and energy prices, rose 5.2% in the year to December, unchanged from the previous month.
Money markets and property professionals fear the Bank of England is less likely to begin cutting interest rates as early as May to boost the economy, which is at risk of slumping into a recession.
The base rate was held at a 15-year high of 5.25% in November for the third time in a row as the central bank bids to bring inflation back under its 2% target.
The FTSE 100 Index slumped by 123 points, or 1.6%, to 7,437.92 in mid-morning trading, following the surprise uptick in inflation.
SPF Private Clients chief executive Mark Harris says: “The downwards rate war continues to pick up momentum although there is no guarantee that mortgage rates will keep tumbling.
“There are bound to be blips as it is still quite volatile out there as today’s inflation figures suggest.
“Swap rates, which underpin the pricing of fixed-rate mortgages, have been falling over the past month but ticked up today on the back of the inflation data, with five-year swaps rising to 3.69% from 3.54% yesterday.”
Rightmove mortgage expert Matt Smith adds: “I’d expect swap rates to rise a little in reaction to today’s surprise inflation figures.
“Average rates had been falling pretty sharply, but this is likely to slow as lenders take a more cautious approach over the next few weeks. The big picture is still positive for mortgage rates, with rates more stable and attractive for movers than a year ago.”
Better.co.uk director of mortgage operations Amanda Aumonier points out: “This shock uptick in inflation could in theory prompt the Bank of England to raise interest rates in an effort to regain control.
“This possibility will raise concerns for anxious homeowners facing the unenviable challenge of securing a new mortgage deal this year, as there’s a fear that mortgage rates could increase. 1.5 million homeowners have fixed-rate deals concluding this year.”
Hargreaves head of personal finance Sarah Coles says: “This bounce in inflation isn’t a massive movement, and isn’t dramatically different to the forecasts, but it’s a surprise, and the markets really don’t like surprises.
“It’s a salient reminder that inflation is likely to trend downwards from here, but not particularly fast, and with plenty of bumps along the way.”
