UK inflation ticked higher at the end of last year but is still expected to fall back to the Bank of England’s 2% target in 2026, reinforcing expectations that interest rates will begin to ease later this year.
Figures published by the Office for National Statistics yesterday showed annual consumer price inflation rose to 3.4% in December, up from 3.2% in October.
The increase marked the first rise since July 2025 but had been widely anticipated by economists and markets.
The rise was driven largely by short-term factors, including a sharp increase in airfares during the festive period and higher tobacco duty.
FLYING COSTS
Air fares rose by almost 29% compared with the previous month, reflecting strong seasonal demand rather than broader inflationary pressure across the economy.
Underlying inflation remained stable. Core CPI, which strips out volatile items such as energy, food, alcohol and tobacco, was unchanged at 3.2%, suggesting domestic price pressures are continuing to ease.
Economists said the data was unlikely to change the MPC’s approach.
Economists said the data was unlikely to change the Monetary Policy Committee’s approach when it meets in early February, with Bank Rate expected to be held steady.
Financial markets continue to price in at least one interest rate cut in the first half of the year as inflationary pressures moderate.
Expectations of falling inflation are underpinned by signs of weaker wage growth and stabilising energy prices from April onwards, factors that are expected to feed through into lower headline inflation over the coming months.
NOT UNEXPECTED
Nicolas Crittenden, Associate Economist, at the National Instituteof Economic Research, says: “This increase, the first since July 2025, was not unexpected.
“An increase in tobacco duty and airlines raising prices for festive travellers are the main drivers of this minor rise and does not indicate permanent price increases across the wider economy.
“Inflation is still expected to fall towards 2% this year due to weakening wage growth and energy prices stabilising from April onwards.
“The Bank of England will therefore not be worried by these numbers. We still predict one cut in Bank Rate in the first half of this year, provided renewed geopolitical tensions do not blow the current path of inflation off course.”
