Key Takeaways
- The UK inflation rate has come in higher than consensus forecasts, while core CPI is lower than forecast.
- Timing played a part in rises in tobacco and airfares in December 2025.
- The Bank of England is expected to hold interest rates next month.
The UK Consumer Prices Index rose by 3.4% in the 12 months to December 2025, up from a rate of 3.2% a month earlier, boosted by alcohol and tobacco costs and airfares, the Office for National Statistics said.
The figures, which exceed the slight uptick of 3.3% forecast by FactSet, mark the first time in five months that inflation has risen. They also complete UK inflation data for the calendar year of 2025, and mean that, overall, annual inflation rose to 3.4% from 3% in 2024.
Core CPI, excluding energy, food, alcohol and tobacco, was steady at 3.2%, unchanged on November’s figures, and slightly below expectations.
“When combined with various confidence surveys, the data continues to paint a relatively gloomy picture,” says Mattioli Woods fund manager Jonathon Marchant.
“Prior to the release, markets were expecting the next interest rate cut to fall in April. Today’s print will do little to change that view, though recent commentary suggests that central bankers expect to hit their target inflation level this year, ahead of schedule. While the data is far from positive, it is not concerning,” he adds.
Why Is UK Inflation Rising Again?
The ONS’s latest bulletin showed that alcohol, tobacco, and transport costs made the largest contributions to inflation in the 12 months to December 2025. The contribution of tobacco pricing to the figures can be explained by the government’s late Autumn Budget, which increased tobacco levies.
“Tobacco duty was increased on Nov. 26, 2025, whereas in 2024 it was increased on Oct. 30. This timing difference may help explain why prices fell by 0.1% in November 2025, compared with a rise of 3.3% a year before, and then subsequently rose by 3.0% in December 2025, compared with a rise of 0.7% a year before,” the ONS said.
Likewise, airfares over the Christmas period played the most significant role in transport costs rising. Air fares rose by 28.6% in December 2025 on the year before, the ONS said, compared with a 16.2% rise in December 2024. Again, the significance of airfares can be explained by a quirk of the calendar, with festive return trips booked earlier in 2025 and the costs being counted in the monthly figures.
Will the Bank of England Continue to Cut Rates in 2026?
Wednesday’s figures raise further questions for the Bank of England, which sets the UK’s interest rates. Throughout 2025, the Bank found itself caught between two opposing economic demands: The pressure to tame resurgent inflation by holding rates, and repeated calls for rate cuts to stimulate the UK’s sluggish economy. That dilemma persists in 2026, despite four interest rate cuts in 2025, which brought the base rate down from 4.75% to 3.75%.
Futures markets still expect the Bank of England’s first rate cut to occur at its April meeting. When the Bank’s Monetary Policy Committee meets next month, markets therefore expect a rate hold. Investors don’t rule out an earlier cut in March but say inflation will need to surprise to the downside in the intervening period.
“The reality is that a 0.1% move here and there is not going to move the needle for policy, making it unlikely that there will be a change to rates at the BoE meeting on Feb. 5,” says James Lynch, investment manager at Aegon Asset Management.
“There is a chance of a move to 3.50% in March but for this to happen we would need to see a couple of lower-than-expected prints between now and then.”
Richard Flax, chief investment officer at investment platform Moneyfarm, says a rate hold next month would be “consistent with the Bank’s messaging that inflation should drift closer to its 2% target by mid-2026.”
“Lower energy bills, moderated demand, and a cooling labor market all support this trajectory. We expect the Bank of England to begin easing policy later this year, most likely from April onward, provided incoming data confirms that inflationary pressures are sustainably receding,” he adds.
