UK markets pulled back this week, with the FTSE 100 Index falling 0.45% to trade at 10,170 points at the time of writing.
UK inflation rose more than expected to 3.4% in December, driven by higher tobacco prices and airfares, ahead of the Bank of England’s decision on interest rates next month. The figure from the Office for National Statistics was above the 3.3% expected by economists in a Reuters poll and November’s reading of 3.2%.
The Bank of England forecast last month that inflation would increase in December, on the back of a rise in tobacco duty and the price of airfares, which can swing over the Christmas holidays. However, the central bank expects that lower energy bills and tepid economic growth will bear down on price pressures in the first half of the year. It has forecast that inflation will fall close to its 2% target in the second quarter.
Core inflation, which excludes energy, food, alcohol and tobacco, held at 3.2% in December, just below expectations. Services inflation, a key measure of underlying price pressures for rate setters, was 4.5%, compared with 4.4% in November.
UK wage growth slowed in the three months to November as employers cut headcount in the run-up to the Budget, helping to reassure the Bank of England that inflationary pressures are easing. Annual growth of 4.5% in average weekly earnings, excluding bonuses, was in line with analysts’ expectations and down from 4.6% in the three months to October.
Private sector wage growth, which Bank of England policymakers view as a key indicator of underlying inflationary pressures in the economy, slowed more sharply to 3.6% excluding bonuses in the three months to November, down from 3.9% in the three months to October. Public sector wage growth was higher at 7.8%, partly because pay awards were made earlier this year than in 2024.
The unemployment rate remained at 5.1%, hovering at its highest level since early 2021, following a long period of weak hiring. The Office for National Statistics said that payroll employment was 155,000, 0.5% lower than a year earlier, in the three months to November.
The redundancy rate was up 1.1% at 4.9%. Provisional figures showed a further fall of 43,000 or 0.1% in payroll employment in December, following Chancellor Rachel Reeves’ tax-raising Budget, although these figures are likely to be revised.
Elsewhere, UK business activity rose more than expected in January and at the fastest pace in just under two years, while retail sales unexpectedly increased by 0.4% in December, suggesting a clearing of pre-Budget uncertainty helped boost sentiment.
Commodity markets
In the commodity markets, Brent crude futures traded around $64 per barrel on Friday and are set to end the week little changed, after US President Donald Trump softened threats toward Greenland and Iran, and on some positive movement that could lead to a solution to end Russia’s war in Ukraine.
President Trump said he has secured total and permanent US access to Greenland in a deal with NATO, whose head said allies would have to step up their commitment to Arctic security to ward off threats from Russia and China. Trump also said he hoped there would be no further US military action in Iran, but added that the US would act if Iran resumed its nuclear program. Iran, operating under sanctions, is the third-biggest crude producer in OPEC, behind Saudi Arabia and Iraq.
President Volodymyr Zelensky of Ukraine said on Thursday after talks with President Trump in Davos that the terms of security guarantees for Ukraine had been finalised but the vital issue of territory in its war with Russia remains unsolved. US and Ukrainian officials have spent weeks in shuttle diplomacy. Trump has pressured Ukraine to secure peace after nearly four years of war; despite few signs Russia wants to stop fighting. A deal to bring peace to Ukraine and lift sanctions on Russia, could reduce oil prices by making fuel more available on global markets. Russian oil output fell 0.8% to 10.28 million barrels per day last year, around a tenth of global production.
Gold prices traded around $4,930 an ounce on Friday, reaching record highs, powered by ongoing political tensions, a softer US Dollar and expectations of Federal Reserve interest rate cuts.
Equity markets
US equity futures fell on Friday after recovering in the prior session following a volatile week of geopolitical and trade tensions.
In Thursday’s regular trading session, the Dow Jones Industrial Average rose 0.63%, the S&P 500 advanced 0.55%, whilst the Nasdaq Composite gained 0.91%. President Trump’s retreat from his tariff threats over Greenland this week followed a sharp stock sell-off, underscoring investors’ power to influence the US President, even as he brushed off Washington’s top allies.
US stocks shed more than $1 trillion on Tuesday, in one of the worst sell-offs since Trump’s ‘liberation day’ tariff announcement in April 2025. President Trump shrugged off the fall as “peanuts” compared with the market’s gains over the past year, but he ditched his plans for steep levies on the UK, France, Germany and others by Wednesday afternoon. The u-turn was the latest example of financial markets’ apparent power to tame Trump.
The US President said on Wednesday that he held a “very productive” meeting with Nato’s Secretary-General Mark Rutte and would hold future talks and find a solution that would be a great one for the US and Nato members. He added that the framework agreement could involve Greenland’s natural resources.
The US economy grew faster than initially thought in the third quarter, while corporate profits were also revised higher. GDP increased at an upwardly revised 4.4% annualised rate, the fastest pace since the third quarter of 2023, the Commerce Department’s Bureau of Economic Analysis said in its updated estimate of third-quarter GDP. The slight upward revision to growth in the July-September period reflected upgrades to exports and business investment. Imports, which are a subtraction in the calculation of GDP, were revised up. Consumer spending and a smaller trade deficit were the key drivers of GDP growth in the third quarter.
The information provided in this communication is not advice or a personal recommendation, and you should not make any investment decisions on the basis of it. If you are unsure of whether an investment is right for you, please seek advice. If you choose to invest, your capital may be at risk and the value of an investment may fall as well as rise in value, so you could get back less than you originally invested.