A shopper browses fruit and vegetables for sale at an indoor market in Sheffield, UK. The OECD recently predicted that the UK will experience the highest inflation among all advanced economies this year.
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The U.K. inflation rate rose to 3.4% in December, above forecasts of 3.3% from economists polled by Reuters.
The inflation rate had cooled sharply to 3.2% in the twelve months of November, with the data encouraging the Bank of England to cut interest rates at its final meeting of the year last month.
Core inflation, excluding energy, food, alcohol, and tobacco, stood at 3.2% in December, unchanged from November, according to the latest figures from the Office for National Statistics.
“Inflation ticked up a little in December, driven partly by higher tobacco prices, following recently-introduced excise duty increases,” the ONS’ Chief Economist Grant Fitzner commented on X Wednesday.
“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,” he added.
These increases were partially offset by a fall in rents inflation and lower prices for a range of recreational and cultural purchases, the ONS noted.
Pound sterling was largely flat against the dollar following the data, at $1.3231.
Chancellor Rachel Reeves told CNBC Wednesday that the Bank of England had expected inflation to rise slightly before it’s expected to cool into spring and summer, toward the central bank’s 2% target.
“That continues to be their expectation and that continues to be my expectation, and that’s going to happen because of the measures I took in my budget last year,” she told CNBC at the World Economic Forum in Davos, Switzerland.
The figures, coming after employment data on Monday which showed further cooling in the labor market, still raise doubts over whether the BOE will proceed with its expected February rate cut, or could hold off a little longer, however.
“A small monthly rise in prices is unlikely to concern policymakers at the Bank of England in the short-term, especially as pay growth continues on a downwards trajectory,” Scott Gardner, investment strategist at J.P. Morgan Personal Investing, said in emailed comments Wednesday.
“If pay growth continues to fall and this is reflected in inflation data, it could place pressure on the Bank of England to cut interest rates faster than expected. Markets are currently pricing in one to two cuts this year but this could change as inflation data for 2026 starts coming through,” he said.
Matthew Ryan, head of Market Strategy at Ebury, said he expects the BOE to remain on hold for at least the next couple of meetings.
“The hawks on the committee have long emphasised upside risks to U.K. inflation, but these arguments are losing steam amid the deteriorating employment picture and the moderation in wage pressures,” he noted Tuesday.
