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UK inflation rose more than expected to 3.4 per cent in December, driven by higher tobacco prices and airfares, ahead of the Bank of England’s decision on interest rates next month.
Wednesday’s figure from the Office for National Statistics was above the 3.3 per cent forecast in a Reuters poll and November’s reading of 3.2 per cent.
The BoE had expected that inflation would pick-up in December, but predicted that lower energy bills and still tepid economic growth would bear down on price pressures in the first half of the year.
The BoE’s Monetary Policy Committee cut interest rates a quarter point to 3.75 per cent last month, its sixth reduction in borrowing costs since 2024. The BoE expects inflation will fall close to its 2 per cent target in the second quarter.
Core inflation, which excludes energy, food, alcohol and tobacco, held at 3.2 per cent in December. Services inflation, a key measure of underlying price pressures for rate setters, was 4.5 per cent compared with 4.4 per cent in November.
“Inflation is sticky but on the right track to reach 2 per cent in the second half of 2026,” said Pooja Kumra, a rates strategist at TD Securities, adding that December’s figure was unlikely to “bring a February rate cut into play” but would allow the MPC to gradually lower rates.
According to the swaps market, traders have all but ruled out a cut from the MPC next month but are betting that lower inflation will give officials the scope to reduce rates by another quarter point in June.
The pound was little changed at $1.343 after Wednesday’s data.
Official figures on Tuesday showed annual private sector wage growth cooled to 3.6 per cent in the three months to November, its weakest pace in five years.
Although the economy expanded 0.3 per cent in November, surpassing expectations, it has lost momentum since the first quarter of last year. Businesses and households have faced high interest rates, rising taxes and geopolitical tensions.
US President Donald Trump this week threatened eight European countries, including the UK, with 10 per cent tariffs on exports from next month unless they backed his ambition to take over Greenland.
Paul Dales, an economist at Capital Economics, said he expected inflation would fall to 2 per cent in April and prompt the MPC to reduce rates to 3 per cent this year.
“Trump’s threatened tariffs add an extra downside risk to inflation further ahead,” he added.