UK inflation rose in December for the first time in five months, adding to evidence that price pressures remain stubbornly embedded in the economy and strengthening expectations that interest rates will remain unchanged at the Bank of England’s February meeting. The increase complicates the policy outlook at a time when growth remains fragile and households continue to face elevated living costs.
Inflation edges higher after months of easing
The annual consumer price inflation rate rose to 3.4% in December, up from 3.1% in November. While still well below the peak levels seen in 2022, the reversal marks a pause in the recent disinflationary trend that had offered policymakers some cautious optimism. Core inflation, which strips out volatile food and energy prices, remained elevated, underlining that domestic price pressures have yet to cool decisively.
Services inflation, closely watched by policymakers as a proxy for wage-driven price growth, continued to run hot. This has reinforced concerns that inflation could settle above target for longer than previously anticipated, even as headline numbers fluctuate.
What is driving the increase?
Several factors contributed to the December rise. Energy prices, while far lower than crisis-era highs, stopped falling at the same pace, while transport and hospitality costs increased seasonally. Food price inflation continued to ease, but not enough to offset broader upward pressures elsewhere in the basket.
Wage growth remains a key variable. Although real wages have started to recover as inflation moderates, pay settlements in services-heavy sectors continue to feed through into prices. This dynamic complicates the inflation outlook and limits the room for early monetary easing.
Policy implications for February
The December data strengthens the case for caution at the Bank of England. Markets and most economists now expect policymakers to keep interest rates on hold at the February meeting, maintaining the current restrictive stance while assessing whether inflation pressures ease further in early 2026.
Officials have repeatedly stressed that a single data point will not dictate policy. However, the return of rising inflation, even modestly, reduces the likelihood of near-term rate cuts. The central bank remains focused on ensuring that inflation returns sustainably to its 2% target, rather than risking a premature loosening that could reignite price growth.
Economic trade-offs remain acute
The policy dilemma is increasingly clear. Holding rates higher for longer helps contain inflation expectations but risks prolonging economic stagnation. UK growth remains weak, business investment subdued, and consumer confidence sensitive to borrowing costs. Mortgage holders, in particular, continue to feel the impact of higher rates as fixed-term deals reset.
At the same time, easing too early could undermine hard-won progress on inflation. The December figures suggest that the final stretch back to target may be uneven, requiring patience from both policymakers and the public.
Outlook: steady policy, uncertain path
Looking ahead, inflation is expected to fluctuate in the coming months as base effects, energy prices, and wage dynamics interact. While further declines are possible later in the year, the December uptick serves as a reminder that the inflation fight is not yet complete.
For now, the balance of risks points towards policy stability rather than change. The Bank of England is likely to remain on hold in February, signalling vigilance rather than victory as the UK navigates the final phase of its post-inflation adjustment.
Newshub Editorial in Europe – 21 January 2026
If you have an account with ChatGPT you get deeper explanations,
background and context related to what you are reading.
Open an account:
Open an account
Recent Comments