Inflation has risen for the first time in five months, hitting 3.4% in December, as transport, alongside alcohol and tobacco, pushed prices higher.
Rising from November’s four-year low of 3.2%, inflation rose above City estimates of 3.3% as air fares jumped compared with low 2024 comparables, and new duties on cigarettes pushed up tobacco prices.
Hopes in the City of a cut in the central interest rate will still likely be dashed for February, though inflation is still expected to fall overall in 2026. The Bank of England expects inflation to near its 2% target by mid-2026.
“The jump from 3.2% to 3.4% [inflation], although a little higher than many economists had forecast, isn’t particularly concerning,” said AJ Bell head of financial analysis Danni Hewson.
“What does warrant closer attention is the stickiness of inflation, entrenched by high food prices and wage hikes that have filtered through to the service sector. Despite rising unemployment and a sluggish economic backdrop, concerns about that stickiness mean markets had already almost entirely priced out a February rate cut from the Bank of England.
“Today’s inflation figures haven’t changed that expectation and markets are still pricing in just one or two interest rate cuts over 2026, with the timing of those cuts still uncertain. But considering the current geopolitical climate and nerves about escalating trade tensions, few people would want to put money on what the economic backdrop might look like in six months’ time.”
Food inflation remained elevated, rising to 4.5% in the 12 months to December, according to the ONS figures, up from 4.2% in November. Beef, chocolate and coffee remained key drivers of rising costs.
FDF director of growth and sustainability Balwinder Dhoot linked the rise in prices to subdued trading for supermarkets over Christmas.
“As costs rise across the board it’s clear that households are feeling the squeeze, resulting in a subdued Christmas for the sector. The low UK consumer confidence, coupled with the prospect of continued geopolitical volatility, is concerning for food and drink manufacturers who face rising costs and tighter budgets themselves,” he said.
“Tackling rising prices and food security is a priority for industry and government alike, and these challenges underscore the need for government to better incentivise investment and productivity growth in our sector. This will help protect the sector from future shocks and help manufacturers minimise price rises for consumers.”
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