UK inflation hits 3.4% in December amid cautious outlook

Published: 21 January 2026. The English Chronicle Desk. The English Chronicle Online.

UK inflation rose to 3.4% in December, marking the first increase in five months, signaling caution for policymakers. According to the Office for National Statistics (ONS), the consumer prices index (CPI) recorded this upward shift, slightly exceeding economists’ forecast of 3.3%. The rise in inflation reflects seasonal factors such as holiday airfares, which jumped compared to a low December 2024 level, alongside higher tobacco duties. Grant Fitzner, the ONS chief economist, noted that rising food costs, particularly for bread and cereals, also contributed to December’s inflation increase.

Analysts expect the Bank of England to maintain interest rates at 3.75% in February, as inflationary pressures remain moderate despite the recent uptick. Yael Selfin, KPMG UK chief economist, explained that the December rise does not reflect domestic price pressures, emphasizing that volatile categories, including travel costs, drove the increase. She added that slowing wage growth could relieve services inflation in the coming months.

The chancellor, Rachel Reeves, reaffirmed her focus on tackling the cost of living following the autumn budget. Measures include £150 off energy bills, a freeze on rail fares for the first time in three decades, a continuation of prescription charge freezes, and increases to both the national minimum and living wages. These interventions aim to shield households from persistent price pressures while supporting economic stability.

Despite the December increase, UK inflation has generally trended downward since September, when it stood at 3.8%. The Bank of England projects inflation will approach its 2% target by mid-2026. Core inflation, excluding volatile items such as energy and food, remained steady at 3.2% in November, demonstrating that underlying price pressures remain contained.

Employment data suggests that inflationary pressures are moderating, with wage growth slowing to 4.5% in the three months to November, down from 4.6% in October. The Bank of England expects this trend to support easing inflation later in 2026, potentially paving the way for interest rate cuts after the summer.

Seasonal factors aside, food prices remain a concern, with staple items like bread and cereals increasing faster than anticipated. Higher tobacco duties and travel costs are temporary drivers of inflation that may not continue into the first quarter of 2026. Economists argue that the MPC will likely overlook these short-term fluctuations when determining policy direction.

Chancellor Reeves emphasized that the UK economy is entering a period where targeted fiscal interventions will complement monetary policy. Her efforts, combined with the Bank of England’s cautious stance, are expected to help households manage living costs while keeping inflation under control. Analysts suggest that, although December’s CPI figure signals a short-term rise, it should not trigger an immediate response from policymakers.

The Bank of England continues to monitor core inflation closely, ensuring that persistent domestic pressures do not undermine economic stability. By excluding energy and food from calculations, core inflation offers a clearer view of trends driven by domestic factors, which remain moderate. Wage growth deceleration further supports the outlook of easing price pressures for the remainder of the year.

Overall, while the headline inflation figure for December signals a temporary uptick, broader trends indicate that inflation in the UK is likely to decrease throughout 2026. The combination of fiscal support measures, slower wage growth, and easing pressures in volatile categories could allow inflation to return closer to the Bank of England’s 2% target. This outlook provides cautious optimism for households and businesses navigating the cost-of-living landscape.

The UK government’s policy mix, emphasizing energy bill relief, transportation freezes, and minimum wage increases, reflects a strategic approach to managing inflation without hindering economic growth. Analysts agree that these measures are likely to have a tangible impact, potentially stabilizing household budgets and maintaining consumer confidence over the coming months.

As the UK navigates its inflation trajectory in early 2026, policymakers are balancing temporary spikes with underlying trends. December’s increase serves as a reminder of external factors influencing prices but does not suggest a shift in the Bank of England’s broader strategy. Households can expect targeted government support and stable interest rates to mitigate short-term pressures while inflation gradually eases.

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