UK annual inflation climbs to 3.4% in December, dampening early BoE rate-cut hopes
By: Abudu Olalekan
UK inflation climbed to 3.4% in December 2025, driven by tobacco, airfares and food prices. Bank of England unlikely to cut rates in February.
It’s the kind of headline that sneaks up on you. One month you’re telling yourself, okay, prices are cooling, maybe we can breathe again. Then the next data drop lands and… nope. Not yet.
Britain’s annual inflation rate ticked higher in December, and it didn’t just rise — it rose more than many analysts expected. According to fresh figures from the Office for National Statistics (ONS), the Consumer Prices Index (CPI) climbed to 3.4% in December, up from 3.2% in November. The market consensus had pointed to 3.3%, so this is a small miss. Still a miss. And in central banking land, tiny misses can feel pretty loud.
For regular people, it’s not “CPI”. It’s that mini shock when the grocery receipt is somehow bigger again. It’s paying for a flight and wondering why the number looks rude. It’s the little things that aren’t little.
The ONS tied the December bump to a few familiar culprits: tobacco prices, airfares, and food costs. That mix matters, because these are the kinds of items households notice quickly. You can delay buying a sofa. You can’t really delay eating, and you can’t negotiate the price of a plane ticket at checkout. Inflation gets personal fast.
Now to the bigger question sitting behind all this: what does it do to interest rates?
This higher inflation reading strengthens the idea that the Bank of England (BoE) may not be ready to cut rates at its next decision. Investors and economists have been watching for any sign that rate cuts are finally close, because borrowing has been expensive for a while and it bites. Mortgages. Business loans. Even just holding debt. It’s all heavier when rates stay up.
One economist already put it pretty bluntly. Paul Dales, chief UK economist at Capital Economics, said this makes a BoE cut at the 5 February meeting less likely, with the policy rate currently at 3.75%. His broader view, though, isn’t all doom. Dales expects inflation to ease back in January and then fall sharply toward the BoE’s 2.0% target by April. That’s a hopeful pathway. But it’s not here today.
And that’s the tricky emotional bit, honestly. Policymakers can say “inflation is expected to ease in 2026,” and they may be right. But households live month to month. Week to week. Sometimes day to day.
There’s also another piece of the puzzle that makes the BoE’s decision more complicated: jobs.
Official data released Tuesday showed UK unemployment sitting at 5.1% at the end of last year, near a five-year high. That’s not a number you ignore. Weakness in the labour market can cool demand and help inflation fall, but it also comes with real pain — fewer openings, less leverage for workers, and more families anxious about what’s next. So the Bank is stuck doing the balancing act central banks are famous for: fight inflation without crushing the economy.
And yes, there’s been a touch of optimism lately on growth. Not fireworks. More like a small light flickering on. Still, when inflation prints hotter-than-expected at the same time unemployment looks soft, it muddies the message. It tells the BoE, “you can’t relax yet,” even if the medium-term trend might still be downward.
So where does this leave things?
In plain terms: December’s inflation surprise makes an early rate cut harder to justify, even if many forecasters think inflation pressures will cool as 2026 moves along. The BoE’s target is 2%. At 3.4%, the UK is not in crisis-mode, but it’s also not in the comfort zone. Not even close.
And for people trying to plan—business owners setting prices, families renewing mortgages, anyone budgeting for spring—this is another reminder that the road back to “normal” is bumpy. It’s not a straight line. Never was.
