UK inflation rose for the first time in five months in December, complicating the outlook for interest rates ahead of the Bank of England’s next policy decision.
Data published by the Office for National Statistics showed the consumer prices index increased to 3.4% in December from 3.2% in November, a sharper rise than economists had expected. Prices increased by 0.4% over the month.
Alcohol and tobacco, alongside transport, made the largest upward contributions to the monthly increase in inflation. City forecasts had pointed to a more modest rise to 3.3%.
Grant Fitzner, chief economist at the ONS, said: “Inflation ticked up a little in December, driven partly by higher tobacco prices, following recently introduced excise duty increases.”
“Airfares also contributed to the increase with prices rising more than a year ago, likely because of the timing of return flights over the Christmas and New Year period. Rising food costs, particularly for bread and cereals, were also an upward driver.”
“These were partially offset by a fall in rents inflation and lower prices for a range of recreational and cultural purchases.”
“The annual increase in the prices for goods leaving factories was unchanged this month while the increase in the cost of raw materials for business slowed, driven by lower crude oil prices.”
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Core inflation, which excludes energy, food, alcohol and tobacco, held at 3.2% in December. Services inflation, a key measure of underlying price pressures for rate setters, was 4.5% compared with 4.4% in November.
Chancellor Rachel Reeves said: “My number one focus is to cut the cost of living. At the budget I announced £150 off energy bills, a freeze to rail fares for the first time in 30 years, a freeze to prescription charges for the second year running, and an increase to the national minimum and living wage. Money off bills and into the pockets of working people is my choice. There’s more to do, but this is the year that Britain turns a corner.”
Bank of England policymakers had anticipated a temporary rise in inflation in December, partly reflecting higher airfares. They have argued that falling energy bills and subdued economic growth should ease price pressures during the first half of the year.
Market pricing suggests traders have largely ruled out an interest rate cut at the Monetary Policy Committee’s meeting next month. However, investors are betting that easing inflation will allow officials to lower borrowing costs by a further quarter point in June.
Yael Selfin, chief economist at KPMG UK, said the data likely “closes the door on a February interest rate cut”, but rate cuts later in the year are still expected.”
She added: “Despite services inflation increasing in December, this was not reflective of domestically generated price pressures and was largely driven by volatile categories, such as airfares. The MPC will likely look through it, particularly with wage growth continuing to slow, which should see services inflation ease over the coming months.”
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, said: “The Bank of England believes inflation has already peaked, with the headline figure expected to ease back towards its 2% target by the end of this year. Lower inflation, coupled with unemployment at a five-year high of 5.1% and easing wage growth are likely to pave the way for further interest-rate cuts in 2026.”
“However, that relief might not happen as soon as households would like. Financial markets currently view a spring rate cut more likely than a move at the Monetary Policy Committee’s next meeting in early February.”
The data come against a mixed economic backdrop. While the economy grew by 0.3% in November, beating forecasts, activity has cooled since the first quarter of last year. Businesses and households have been weighed down by high interest rates, rising taxes and ongoing geopolitical tensions.
External risks have also increased. US president Donald Trump this week threatened eight European countries, including the UK, with 10% tariffs on exports from next month unless they supported his ambition to take over Greenland.
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Pieter Reynders, partner at McKinsey & Company, said: “Inflation reversed its 6 month-long downward trend, edging back up to 3.4%. While the rise is modest, it highlights how difficult the journey to price stability is proving. Inflation in some categories is peaking at levels of 5% and above, notably alcohol and tobacco. Food inflation remain elevated. After a zig zag path downwards, it has ticked back up to 4.5%.”
“The weight of inflation is shifting consumer spending habits. Our research shows the UK is the only European market where the saving rate is going down in a statistically meaning way. More households are now using credit cards to cover essentials, dipping into savings, and tracking expenses more closely.”
Official figures published on Tuesday showed annual private sector pay growth eased to 3.6% in the three months to November. The slowdown will be welcomed by Bank of England policymakers, who have been watching closely for evidence that easing labour market pressures are feeding through to lower inflation.
Saxo’s investor content strategist, Neil Wilson said: “In recent months, we’ve seen a material stepdown in inflation in the UK, which is no longer as much of an outlier compared with peers. It looks like we are heading to 2.5% inflation by end of the year and should be closer to the 2% target next year. Some Bank of England (BoE) officials remain concerned about inflation, but yesterday’s wage and employment data suggest those fears are overdone.”
“Sticky wage growth and services inflation are less of a problem as the jobs market cools. Payrolls are softening and unemployment is at a four-year high against a backdrop of a materially more challenging trade and geopolitical backdrop. In this environment, I believe the BoE will cut rates further than markets have expected, even absent any major geopolitical or liquidity shocks, with an additional 75bps of cuts this year, taking the base rate down to 3.0%.”
Despite the uptick in December, inflation is still expected to ease over the course of 2026, after following a broadly downward path since reaching 3.8% in September. The Bank of England has said it expects inflation to move close to its 2% target by the middle of this year.
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