UK inflation climbs to 3.4% in December

UK inflation rose unexpectedly in December, climbing to 3.4% from 3.2% in November, according to new figures from the Office for National Statistics (ONS). The increase marks the first upward move in the headline Consumer Prices Index (CPI) since July and overshot economists’ forecasts of a modest rise to 3.3%.

The ONS said the acceleration was driven primarily by higher tobacco prices and a jump in airfares, both of which made the largest upward contributions to the annual inflation rate. Alcohol and tobacco, along with transport costs, also had the strongest impact on the month-on-month rise.

The broader CPI including owner occupiers’ housing costs (CPIH) climbed to 3.6% in the year to December, edging up from 3.5% the previous month. On a monthly basis, both CPI and CPIH rose by 0.4%, compared with a 0.3% increase in December 2024.

Core measures of inflation were more stable. Core CPIH, which strips out energy, food, alcohol and tobacco, remained at 3.5%, while core CPI held at 3.2%. Goods inflation picked up slightly, rising from 2.1% to 2.2%, while services inflation stayed elevated at 4.5%.

The stronger-than-expected figure comes just weeks before the Bank of England’s next interest rate decision, and sharply reduces any prospect of a rate cut in February. Market expectations had already cooled following recent data showing persistent strength in wage growth and services inflation.

Despite the setback, some industry leaders urged caution before interpreting the rise as the start of a renewed inflationary trend.

Mike Randall, CEO at Simply Asset Finance, said the increase may reflect temporary fluctuations rather than a sustained resurgence.

“A rise in inflation is a slight bump in the road, but there are hopes this is simply the economy ‘settling’ rather than the start of a new spike,” he said. “If recent growth figures are anything to go by, the UK has more momentum than many expected, suggesting this is a small setback on a generally better path.”

Randall warned that the government must “keep a close eye” on small business margins as firms continue to grapple with high materials, energy and service costs. He added that improving awareness of available financial support is crucial, particularly as 54% of SMEs now feel they are less likely to get a loan approved than two years ago.

Neil Rudge, Chief Banking Officer at Shawbrook, said SMEs would be “disappointed” by the inflation uptick, but pointed to last week’s stronger-than-expected GDP data as a sign of underlying resilience.

“The better-than-expected GDP reading was a pleasant surprise – and offers hope to the nation’s business community that better economic conditions will materialise this year,” he said.

With borrowing costs expected to ease later in 2026, Rudge said many small and medium-sized firms may begin revisiting investment and funding plans.

“Finding a lending partner with the right expertise and flexibility is key, and businesses should consider looking at specialist options alongside the usual high street brands to help unlock maximum value,” he added.