UK inflation climbed more than expected in December, driven by higher air fares and tobacco prices, but markets remain confident the Bank of England will cut interest rates later this year as underlying price pressures ease
British inflation rose by more than expected in December, driven largely by higher airfares and tobacco prices, but economists and investors remain confident that price pressures will ease sharply in the coming months as one-off factors fade.
Data from the Office for National Statistics showed headline consumer price inflation climbed to 3.4 per cent in December, up from 3.2 per cent in November. The reading exceeded the median forecast of 3.3 per cent in a Reuters poll of economists.
Despite the upside surprise, markets barely reacted. Investors held steady on expectations that the Bank of England will begin cutting interest rates later this year, with underlying price pressures evolving broadly in line with central bank projections.
“Although the uptick is larger than expected, for now it’s a speed-bump, rather than an indication we are veering off course on the road to price stability,” Adam Deasy, economist at PwC, told Reuters.
Services inflation edges up as expected
Services price inflation—closely watched by the Bank of England as a signal of domestically generated pressure—rose to 4.5 per cent in December, from 4.4 per cent a month earlier. The increase was in line with economists’ expectations.
The UK continues to record the highest inflation rate among the Group of Seven economies, even as economic growth remains weak. However, economists say this distinction is likely to fade as upcoming data reflects falling energy bills and the rolling-off of last year’s increases in regulated prices.
Relief expected in early 2026
Analysts widely expect inflation to slow sharply in the months ahead as last year’s rises in utility costs and other government-controlled tariffs drop out of annual comparisons.
Bank of England Governor Andrew Bailey has said inflation is likely to fall close to the central bank’s 2 per cent target by April or May.
Currency markets were unmoved by Wednesday’s data, with the pound little changed, while market pricing for interest rates remained steady.
“The Bank of England will not be worried by these numbers,” Nicholas Crittenden, economist at the National Institute of Economic and Social Research, told Reuters. “We still expect one cut in Bank Rate in the first half of this year, provided renewed geopolitical tensions do not derail the disinflation path.”
Tobacco duty, airfares push prices higher
As expected, tobacco products and airfares were the biggest contributors to December’s rise in inflation. Tobacco prices jumped following an increase in excise duty, while airfares surged due to seasonal travel patterns around Christmas and New Year.
Despite the December rise, the UK’s consumer price and services inflation remain slightly below the Bank of England’s November forecasts.
Rate cut bets remain intact
In December, the Bank of England’s Monetary Policy Committee cut the Bank Rate to 3.75 per cent, though the decision was closely split, with almost half of policymakers voting to hold rates steady amid concerns over persistent inflation pressures.
Producer price data added to the mixed picture. Prices charged by businesses in the services sector rose sharply in the fourth quarter, climbing to 2.9 per cent from 2 per cent in the previous quarter. By contrast, prices charged by manufacturing firms were flat in December, suggesting limited pipeline pressure from goods producers.
For now, economists say December’s inflation rise looks more like a temporary detour than a reversal, keeping the Bank of England on track for cautious easing later this year.
With inputs from agencies.
End of Article
Leave a Reply