U.K. inflation edged higher in December, driven by tobacco and transport prices, while core inflation stayed flat, complicating the Bank of England’s outlook as the pound weakened slightly.
U.K. inflation accelerated slightly in December, although the core rate remained unchanged, data released by the Office for National Statistics (ONS) on Wednesday showed.
How Headline Inflation Numbers Stack Up? Alcohol, tobacco and transport prices had the biggest upward impact on consumer prices in December.
- The consumer price index (CPI) rose 3.4% year over year (YoY), faster than the 3.2% rate in November; Consensus 3.3%
- The core CPI, which excludes energy, food, alcohol and tobacco, increased 3.2%, the same pace as in the previous month; Consensus 3.3%
- The CPI, including owner occupiers’ housing costs (CPIH) — the measure which the ONS provides as its lead measure — rose at an accelerated pace of 3.6% versus 3.5% in November.
- The core CPIH growth remained steady at 3.5%.
Owner occupiers’ housing (OOH) costs increased 4.2% YoY in December, slower than the 4.5% growth in November and nearly half the 8% pace seen in the year-ago period.
Source: ONS
Alcohol and tobacco prices climbed 5.2% YoY in December, and transport prices rose 4%, compared to 4% and 3.7%, respectively in November. Both contributed 0.4 percentage points each to the headline number.
The CPI is used by the U.K. government for inflation targeting and also it is produced to international standards in line with European regulations.
On a month-over-month basis, CPI as well as the CPIH edged up 0.4% in December compared to the 0.3% rise in the year-ago period. The November’s monthly rate was a negative 0.2% and a negative 0.1%, respectively. The increases, however, were in line with expectations.
Retail price inflation (RPI) quickened to an annual rate of 4.2% from 3.8% in November and 3.5% in the year-ago period. Economists, on average, estimated a more modest 4.1% increase.
Commenting on the data, ONS Chief Economist and Director Grant Fitzner said, “Inflation ticked up a little in December, driven partly by higher tobacco prices, following recently-introduced excise duty increases.”
Fitzner underscored the higher airfares, potentially due to the timing of the return flights over the Christmas and New Year, and higher bread and cereal prices. On the other hand, fall in rents inflation and lower prices for recreational and cultural prices helped offset some of the increases, he added.
The economist also noted an unchanged rate of increase in the prices of goods leaving factories and also a slowdown in the increase in the cost of raw materials for businesses due to lower crude oil prices.
What Does CPI Print Mean For Interest Rate? The slight acceleration in inflation could leave the Bank of England in a tight spot. The central bank cut its key policy rate four times in 2025, bringing it down by quarter-point in each of these instances.
Source: BoE
But some economists are more sanguine. JPMorgan Personal Investing Chief Investment Strategist Scott Gardner said, “A small monthly rise in prices is unlikely to concern policymakers at the Bank of England in the short-term, especially as pay growth continues on a downwards trajectory,” according to CNBC.
The central bank target for annual CPI is 2%. U.K. Chancellor Rachel Reeves reportedly told CNBC that the BoE expects inflation to rise slightly before cooling into spring and summer, enroute to hitting the 2% target.
How Pound Reacted To Data: The U.K. pound (GBP) has weakened slightly against the dollar in the aftermath of the data, as it fetched $1.3406.
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