UK inflation rises for first time in five months

The latest official figures reveal that the UK rate of inflation has risen for the first time in five months, reaching 3.4% in the year to December. This increase was higher than expected, with analysts attributing it to higher tobacco prices and airfares. However, experts believe that this spike is not indicative of a longer-term trend, as it was influenced by one-off factors such as Christmas flight costs and a tobacco tax hike announced in the Budget.

The Bank of England’s Monetary Policy Committee is set to convene in February to discuss interest rates, following a reduction to 3.75% at the end of 2025. Despite the uptick in inflation from 3.2% in November, former rate-setter Michael Saunders does not anticipate a rate cut in February but expects gradual reductions throughout the year. He emphasized that the current levels of inflation and wage growth are still too high for comfort.

The Office for National Statistics (ONS) highlighted airfares as a significant contributor to inflation in December, citing the timing of return flights over the holiday season. Additionally, tobacco prices saw an increase due to duty rises announced in the Budget, while rising food costs, particularly for bread and cereals, also played a role in driving inflation.

Chancellor Rachel Reeves emphasized her commitment to reducing the cost of living, mentioning measures such as a freeze on rail fares and prescription charges in the Budget. However, shadow chancellor Mel Stride criticized the government for what he called “economic mismanagement,” attributing the rise in inflation to a record-high tax burden and irresponsible borrowing.

Despite the overall increase in inflation, some components saw a decrease in December, such as rents. Housing and household services, which includes rents, slowed to 4.9% compared to a 5.1% rise in the previous month.

Transport prices rose by 4% in the 12 months to December, primarily driven by airfares. Sarah Coles, head of personal finance at Hargreaves Lansdown, pointed out that the timing of flight prices around Christmas impacted the inflation rate, with prices being lower on high days and holidays and higher as people traveled for the holidays.

Food and non-alcoholic drinks also saw a 4.5% increase in prices, driven by bread, cereals, and vegetables. Balwinder Dhoot, director of growth and sustainability at the Food and Drink Federation, expressed concern about rising costs affecting households and the food and drink sector.

In comparison to European counterparts, the UK’s inflation rate in December was higher, with Germany at 2% and France at 0.7%. Sanjay Raja, chief UK economist at Deutsche Bank, predicted a significant decrease in UK inflation in January, with the Bank of England’s 2% target potentially within reach by spring. He anticipated that the UK would experience the most substantial decline in headline inflation among G7 countries this year.