UK inflation rose for the first time in five months in December, adding to expectations that the Bank of England will pause before making further changes to interest rates early next year.
Official figures published on Wednesday showed consumer prices increased at an annual rate of 3.4% last month, up from 3.2% in November and above economists’ forecasts of a modest rise to 3.3%.
The increase follows a period of easing price pressures, with inflation having fallen in October and remained flat through much of the autumn.
The rebound in inflation is likely to reinforce the Bank of England’s cautious stance as it weighs the timing of further monetary easing after a series of rate cuts in 2025.
Inflation rise complicates rate outlook
The rise in December inflation suggests the central bank’s Monetary Policy Committee will keep its key interest rate at 3.75% when it meets in early February.
While the Bank cut rates for a fourth time in a year in December, almost half of policymakers voted to hold borrowing costs steady, citing concerns that inflation pressures could persist.
Most economists now expect the next reduction to come in April, assuming price growth resumes its downward trend in the coming months.
The Bank of England has forecast that inflation will move closer to its 2% target by the middle of this year, despite the latest uptick.
Although inflation remains elevated, it is still expected to fall overall in 2026, having eased from a recent peak of 3.8% in September.
Britain’s inflation rate remains the highest among the Group of Seven economies, even as growth continues to lag behind peers.
Policy measures and wage growth in focus
Chancellor Rachel Reeves has made tackling the cost of living a central priority, alongside measures aimed at repairing the public finances.
Her November budget included £26bn of tax increases and commitments to lift the two-child benefit cap, as well as steps to ease pressure on household bills.
The Bank of England has said policies such as relief on energy bills, prescription charges and fuel duty are expected to lower headline inflation this year.
Separate data released this week also pointed to easing domestic pressures, with wage growth slowing to 4.5% in the three months to November, down slightly from the previous period.
Economists expect inflation to slow sharply in the months ahead as last year’s rises in utility costs and other regulated prices fall out of the annual comparison.
Pound steady amid global uncertainty
Sterling showed little reaction to the inflation data, holding steady against the dollar as investors continued to focus on broader geopolitical risks.
Currency markets have been dominated this week by concerns over renewed trade tensions between the United States and Europe, overshadowing economic indicators.
Bank of England Governor Andrew Bailey has said inflation is likely to be close to the 2% target by April or May.
However, policymakers remain divided over how quickly to move, particularly if global developments weigh on growth.
Financial markets are currently pricing in one, or possibly two, quarter-point interest rate cuts by the Bank of England in 2026, reflecting uncertainty over the balance between slowing inflation and a fragile economic recovery.
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