UK inflation climbed for the first time in five months in December, adding to expectations that the Bank of England will hold off on major interest rate moves early this year. Official data showed consumer prices rose 3.4% compared with a year earlier, up from 3.2% in November and slightly above forecasts of 3.3%.
The rise follows a period of easing price pressures, with inflation having fallen in October and remaining mostly flat through autumn. The uptick is likely to reinforce the Bank of England’s cautious approach as it considers the timing of further monetary easing after multiple rate cuts in 2025.
The December increase suggests the Bank’s Monetary Policy Committee may keep the key interest rate at 3.75% when it meets in early February. Although rates were cut for a fourth time last year, almost half of policymakers voted to hold rates steady due to lingering inflation concerns. Most economists now expect the next reduction to come in April, assuming price growth continues to slow.
The Bank of England forecasts inflation will move closer to its 2% target by mid-2026, despite the recent uptick. Overall, inflation is still expected to fall this year, having eased from a peak of 3.8% in September.
Britain’s inflation remains the highest among Group of Seven economies, even as growth lags behind peers. The government has focused on tackling the cost of living while repairing public finances. Chancellor Rachel Reeves’ November budget included £26bn in tax increases, measures to lift the two-child benefit cap, and steps to ease household bills. The Bank expects policies like relief on energy bills, prescription charges, and fuel duty to help lower headline inflation this year.
Separate data showed wage growth slowing slightly to 4.5% in the three months to November, indicating easing domestic pressure. Economists expect inflation to fall more sharply as last year’s rises in utility and regulated prices drop out of comparisons.
Sterling remained steady against the dollar, with currency markets more influenced by global risks such as US-Europe trade tensions than domestic inflation data. Bank of England Governor Andrew Bailey said inflation is likely to be close to 2% by April or May, but policymakers remain split over how quickly to act if global developments affect growth. Financial markets are currently pricing in one or possibly two quarter-point interest rate cuts by the Bank in 2026, reflecting the delicate balance between slowing inflation and a fragile economic recovery.
