Prices were a good deal stronger than expected at year-end. A 0.4 percent monthly spurt was double the market consensus and large enough to lift the annual inflation rate from 3.9 percent to 4.0 percent. This was the first increase in the yearly rate since February last year and widens the overshoot versus the medium-term target to 2.0 percentage points.

Core prices were also firm but December is a seasonally strong month and a 0.6 percent monthly increase only left the underlying inflation rate steady at 5.1 percent. Overall goods inflation actually dipped from 2.0 percent to 1.9 percent but the rate in services climbed from 6.3 percent to 6.4 percent.

The main upward contribution to the change in the annual headline rate came from alcohol and tobacco where prices jumped 1.3 percent on the month versus a 1.1 percent rise in the same period in 2022. Recreation and culture (0.2 percent after minus 0.2 percent) and communication (minus 0.6 percent after minus 1.0 percent) also provided a modest boost. On the downside, miscellaneous goods and services fell 0.3 percent after a 0.3 percent gain in December 2022.

The surprisingly robust December report all but guarantees that the BoE MPC will vote in February to leave Bank Rate at 5.25 percent. That said, today's data leave intact a downward trend in core inflation that should still pave the way for lower borrowing costs later in the year. Today's updates put the UK's RPI at 19 and the RPI-P at 17. Both measures show overall economic activity still running somewhat ahead of market expectations.

At 3.9 percent versus expectations for 4.4 percent, consumer prices fell sharply and, for a second month in a row in November, more than expected. December's expectation is 3.8 percent with the monthly rate rising 0.2 percent after falling 0.2 percent in November.

The consumer price index (CPI) is an average measure of the level of the prices of goods and services bought for the purpose of consumption by the vast majority of households in the UK. It is calculated using the same methodology developed by Eurostat, the European Union's statistical agency, for its harmonised index of consumer prices (HICP). The CPI is the Bank of England's target inflation measure.

The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as the UK, where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer. Inflation is an increase in the overall price level of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

For monetary policy, the Bank of England generally follows the annual change in the consumer price index which is calculated using the European Union's Eurostat methodology so that inflation can be compared across EU member states.