UK inflation surprised to the upside in December, giving the Bank of England’s policymakers fresh food for thought at the start of 2026.
The ONS has reported that UK Consumer Prices Index (CPI) rose by 3.4% in the 12 months to December 2025, up from 3.2% in the 12 months to November, a rise in inflation higher than expected partly due to rising costs of airfares and tobacco products.
While some of the uplift reflects seasonal and timing effects associated with the Christmas period, the data nonetheless complicates the outlook for the Bank of England’s Monetary Policy Committee ahead of its February meeting. Core inflation remains sticky at 3.2% giving a particular headache, and the chances of a much-anticipated interest rate cut look to have diminished as a result.
For advisers, the implications are more immediate. Cost-of-living pressures remain a key consideration for clients, while investment strategists will be scrutinising the figures for clues on interest rates, inflation persistence and asset allocation in the months ahead.
Experts from across the financial services profession shared their initial reactions to this morning’s data with IFA Magazine:
Danni Hewson, AJ Bell head of financial analysis, comments.
“December’s inflation jump can be partially explained by the dates covered in today’s data capturing the airfares for many winter holiday makers.
“Whilst volatility in the prices of food or fuel is often expected, the timing of return flights to the UK from both long and short-haul destinations that were tracked by the ONS had a huge impact on December’s inflation figures.
“Few people want to be in the air on either Christmas Eve or New Year’s Eve, which were the comparable dates looked at in 2024. The most recent dates would have given passengers time to unpack and even get a wash on, ready to enjoy festivities in the comfort of their own homes.
“There was also the timing of last year’s Budget meaning the hike in tobacco duty was counted in the December data rather than the previous month, so the jump from 3.2% to 3.4%, although a little higher than many economists had forecast, isn’t particularly concerning.
“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.
“For households, every story is different. Certainly, some government measures like freezing rail fares and prescription fees will help budgets in the coming months, but most will have a keen awareness of how sticky prices are when it comes to those everyday essentials.”
Luke Bartholomew, Deputy Chief Economist, at Aberdeen said;
“Given the rapid fall in inflation in recent months, a small bounce higher in headline inflation was always likely. And the fact that the bounce was largely driven by highly volatile airline fares means policymakers and the market are likely to look through this noise. Indeed, with the crucial services inflation component a little softer, the big picture is that inflation is on track to return to 2% later this year. With yesterday’s jobs data showing that the labour market remains weak, the pieces are still very much in place for further Bank of England easing. However, today’s data probably do now firmly rule out a February cut, with the next rate reduction probably set for March instead.”
Kevin Brown, savings expert at Scottish Friendly, has commented on this morning’s latest inflation data from the ONS:
“December’s inflation reading shows that the road back to the Bank of England’s 2% target isn’t necessarily a straightforward one.
“An increase demonstrates that price pressures can still re-emerge, particularly around seasonal periods like Christmas when demand spikes and discounts unwind.
“Some of this rise was likely driven by temporary factors, including higher festive spending and volatility in food and services prices. But the fact remains that inflation prevails well above the BoE’s target and as a result, the case for another rate cut at its February meeting looks unlikely.
“For borrowers, ambiguity continues. Mortgage rates are still expected to trend down over the year, but today’s data might mean that comes more slowly than hoped.
“For savers, rising inflation highlights evermore the problem that inflation can quickly chip away the real value of cash savings. A short-term rise in prices reduces purchasing power immediately, and cash returns often struggle to keep up over sustained periods.
“That’s why it remains wise to look beyond cash for long-term goals. Investing has historically offered a far better chance of protecting purchasing power and growing wealth over time. In an environment where inflation continues to erode cash, that distinction is key.”
Adam Gillespie, Partner, XPS Group, commented:
“UK CPI inflation for the 12 months to December has increased to 3.4% reversing the direction of travel after two months of falls. While an inflation uptick was widely expected, today’s increase will be unwelcome news for households and businesses, and a setback for the Government’s disinflation ambitions.
December data can be volatile, but this release is a stark reminder of just how much work remains to bring inflation towards the Bank of England’s 2% target.
Against a backdrop of tariff tensions and geopolitical uncertainty, the risk of renewed global inflation is rising, limiting the scope for rate cuts from central banks, including the Bank of England. These external pressures add to the UK’s existing inflation challenges.
For DB pension schemes, gilt yields remain far more important than the headline CPI figure. Gilt markets continue to be volatile, with Q4 seeing material falls in long-dated yields, while ongoing gilt curve fragmentation is amplifying hedging mismatches. This environment reinforces the need for robust LDI strategies that can adapt to changing market conditions.”
Isabella Galliers-Pratt, Senior Investment Director at Rathbones, said:
“This morning’s inflation data delivered a mild setback, with the annual CPI rate rising to 3.4% in December, up from 3.2% in November. It’s a reminder that, despite some encouraging progress in recent months, inflation remains stubbornly elevated at a time when the Chancellor is trying to steady the public finances.
“The increase was driven largely by services and by further rises in food prices — notably bread and cereals — which continue to squeeze household budgets already under strain from the cost-of-living pressures.
“Whilst conflicting forces will shape the inflation outlook over the rest of the year — with cuts to energy bills and freezes on rail fares and prescription charges offering some relief, but minimum wage increases, National Insurance changes and higher business taxes adding upward pressure — the overall impact is likely to remain finely balanced.
“Today’s reading further complicates the position for the Bank of England, who need to juggle the cooling labour market, where private sector wage growth fell to its weakest level in five years, and payrolls dropped by 43,000 — the sharpest monthly fall since 2020, with an increasingly sticky inflationary backdrop, which will limit their room to manoeuvre.
“Today’s rise, though modest, reinforces a broader theme: inflation has been more persistent than many hoped. And with geopolitical uncertainties adding further pressure on global supply chains, the outlook for imported inflation remains unsettled.
“For now, the path back to more comfortable inflation levels is still in sight, but it may take longer than expected and progress is unlikely to be linear.”
Simon Webb, managing director of capital markets and finance at LiveMore, comments:
“The markets weren’t expecting inflation to rise again, and this is a blow to the Bank of England’s plans to bring inflation down to its 2% target. No-one wants a return to the rising prices over recent years so hopefully this is a minor setback on an otherwise downward trajectory.
“Looking at the bigger picture, the mortgage market is far less volatile than this time last year. For the later life lending market, a more stable outlook helps borrowers plan with greater certainty. Many over-50s are making financial decisions that span decades, and while short-term movements are inevitable, the long-term need for flexible, accessible borrowing options remains clear.
“This period offers a chance to strengthen conversations around building financial resilience in later life, ensuring older borrowers continue to benefit as the market evolves in a positive direction.”
Caitlyn Eastell, Personal Finance Analyst at Moneyfactscompare.co.uk, said:
“January is the ideal time for savers to set new financial goals and to check if their savings are working as hard as they can. While there has been a promising jump to short-term fixed bonds, this doesn’t follow the trend as most of the top rates have dropped month-on-month, so it is crucial that savers are fast to react to attractive deals, otherwise they face missing out.
“Over the past two years, savers who have selected the top one-year bond each year are around £50 worse off compared to those who locked away £10,000 for two years upfront. Although the shortest terms typically look the most attractive, savers were protected from cuts for longer with a two-year bond. When interest rates are near their peak, committing to longer terms can outperform ‘rate-hopping’.
“Inflation is set to fall this year, reaching its target around mid-2026. This will be promising news for savers’ returns as they could grow in ‘real’ value. However, pair this with tumbling savings rates and savers may find themselves in a similar situation where their accounts are struggling to keep pace. While there is no immediate threat of a base rate cut, with a change unlikely to happen in February, savers might get some reprieve but if inflation does indeed ease to its target, this could encourage the Bank of England to make cuts.”
Richard Flax, Chief Investment Officer at Moneyfarm, said:
“UK headline inflation rose for the first time in five months, ticking up to 3.4% in December from 3.2% in November. The increase was modest but slightly above consensus expectations of 3.3%, and was driven by a mix of seasonal and policy‑related factors.
Higher airfares over the Christmas period, increases in tobacco duty, and rising food prices, particularly bread and cereals, were the main contributors to the upward move. These pressures were partially offset by softer inflation across rents, recreational goods, and cultural services.
Core inflation remained broadly steady at 3.2%.
The December uptick is unlikely to change the Bank of England’s near‑term stance. Markets still expect the MPC to keep rates on hold at 3.75% in February, 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 labour market all support this trajectory. We expect the Bank of England to begin easing policy later this year, most likely from April onwards, provided incoming data confirms that inflationary pressures are sustainably receding.”
Jonathon Marchant, Fund Manager at Mattioli Woods, said:
“This morning’s UK CPI data showed inflation running at 3.40% year-on-year, exceeding the 3.30% consensus forecast. Notably, core inflation of 3.20% was slightly below expectations. While last week’s GDP numbers also came in ahead of expectations, they were flattered by the rebound in activity following Jaguar Land Rover’s cyber-attack. Recent jobs data showed permanent staff placements falling again in December and private weekly earnings fell back to +3.6% yesterday, undershooting consensus expectations.
When combined with various confidence surveys, the data continues to paint a relatively gloomy picture. 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. Lower interest rates remain vital to increasing spending and domestic activity, which we believe is supportive for the mid and small cap space.”
George Lagarias, Chief Economist at Forvis Mazars comments:
“If anything, inflation is living up to its reputation as a difficult beast to tame. The number today justifies the central bank’s cautious stance, and pours cold water on rate cut expectations. Still, we remain optimistic that prices will subside, and rates will fall in 2026, as a result of wage cooling and more muted economic growth.
Derrick Dunne, CEO of You Asset Management, has commented:
“Inflation took a surprise uptick in December which could now preclude any chances of a rate cut in early February. The Bank of England’s Monetary Policy Committee (MPC) was finely balanced at its last meeting, making the likelihood of more ‘wait and see’ stronger given these numbers.
“That being said, some of what drove price rises in December was circumstantial, including duty-linked tobacco price increases and air fares falling on dates that distort the year-on-year comparisons. Rising food costs is a worry – but is ultimately a volatile and unreliable measure of the overall direction of travel.
“Perhaps indicative of this, core inflation has stood still. While it would be preferable to see this fall – this is still better than an increase. All in though it does point clearly that the inflation game is not yet run.
“Rate setters will be moving with an abundance of caution. If they do plump for a surprise cut on 5 February, it will be with rising unemployment and flatlining GDP in mind. Looking through inflation figures in this way is however a risky business. Forward-looking expectations for inflation are still for it to fall further, what matters now is the pace of that decline.
“Anyone unsure what this could mean for their long-term financial plans should consider consulting with a financial planner.”
Phoebus Software’s chief sales and marketing officer, Richard Pike, says:
“Inflation has been gradually falling from its August peak of 3.8% so it’s disappointing to see it tick up again. Hopefully this is a minor blip, fuelled by Christmas spending on alcohol, tobacco and transport, and we’ll see prices start to decrease again during the early part of 2026.
“Mortgage rates continue to come down due to fierce competition in the market, but the Bank of England will keeping a close eye on next month’s CPI figure ahead of the next base rate decision in February.”
Mike Ambery, Retirement Savings Director at Standard Life, part of Phoenix Group, said:
“Today’s inflation data shows that progress on price pressures remains uneven, with CPI rebounding to 3.4% in December after a larger-than-expected dip in November. Seasonal factors such as higher Christmas travel costs and increased tobacco duties look to have played a role, highlighting that the journey to the Bank of England’s 2% target is unlikely to be smooth.
“With underlying inflation still elevated, these figures are unlikely to give the Bank of England the confidence it needs to cut interest rates again at next month’s MPC meeting, with policymakers likely to remain cautious for now.
“For households, this uncertainty makes planning more difficult. While last month’s rate cut saw many lenders move quickly to reduce mortgage rates, borrowers shouldn’t expect a straightforward downward journey from here. The picture is also complex for savers. Persistent inflation may keep cash savings rates higher for longer, but cash rarely keeps pace with inflation over the long term. For those able to take a longer-term view, investing, including through tax-efficient ISAs or pensions, can offer a better chance of protecting savings from inflation while also building financial resilience for the future.
“For those already in retirement and drawing an income, having a clear plan that balances reliable income with protection against inflation remains crucial.”
Sarah Pennells, consumer finance specialist at Royal London comments on latest UK inflation figure:
“For many households, this will be unwelcome news to kick off the New Year, and for those who’ve not yet had their January payday, the financial hangover from Christmas might still be very real.
“The cost of daily essentials creeping up yet again, and money needing to stretch just that little bit more, has put a particular spotlight on food price inflation, which continues to hit families hard. It’s a reminder that, while inflation is discussed in percentage points and economic forecasts, the real impact is felt every time we do the weekly shop or pay our household bills.
“Royal London’s financial resilience research shows that more than half (59%)* of UK adults are now very concerned about the rising cost of living. That’s not surprising when you consider the cumulative effect – it’s not just one thing going up, but a cascade of increases across food, fuel, and housing costs. People are having to make tough choices about their spending, with many cutting back on non-essentials and looking for ways to make their money go further.”
Commenting, Kris Brewster, Director of Retail Banking at LHV Bank, said:
“This rise in CPI inflation to 3.4% will worry many people and raises fresh questions about the Bank of England’s grip on the economy. After repeated signals that price growth was coming under control, this move shows how uncertain the position still is, especially as services costs remain high.”
“After missing its target for well over a year, it is hard to argue that the Bank has inflation firmly under control. Each setback adds more pressure on households who are already struggling with high bills and wages that are not keeping pace.”
“In this environment, people cannot rely on the wider economy to protect their spending power. Making active choices matters. Using savings and current accounts that still reward loyalty, and shopping around for better rates, helps money work harder and can soften the impact of rising costs.”
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