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Britain’s inflation rose more than expected to 3.4 percent in December due to higher tobacco prices and airfares, ahead of the Bank of England’s decision on interest rates next month.
Wednesday’s figure from the Office for National Statistics was higher than a Reuters poll forecast of 3.3 percent and November’s forecast of 3.2 percent.
The BOE expected inflation to rise in December, but predicted that lower energy bills and still-slow economic growth would put downward pressure on prices in the first half of the year.
The BoE’s monetary policy committee last month cut interest rates by a quarter point to 3.75 percent, the sixth cut in borrowing costs since 2024. The BoE expects inflation to fall closer to its 2 percent target in the second quarter.
Core inflation, which excludes energy, food, alcohol and tobacco, stood at 3.2 percent in December. Services inflation, a key measure of underlying price pressures for rate-setters, stood at 4.5 per cent, compared with 4.4 per cent in November.
“Inflation is sticky, but on track to reach 2 percent in the second half of 2026,” said Pooja Kumra, rates strategist at TD Securities. He said the December data was unlikely to “bring about a February rate cut” but would allow the MPC to gradually lower rates.
According to the swap market, traders have ruled out an MPC cut next month, but are betting that low inflation will give officials room to cut rates another quarter in June.
The pound was little changed at $1.343 after Wednesday’s data.
Official data on Tuesday showed private sector annual wage growth slowed to 3.6 percent in the three months to November, its weakest pace in five years.
Although the economy expanded 0.3 percent in November, exceeding expectations, the pace has slowed since the first quarter of last year. Businesses and households have faced higher interest rates, rising taxes and geopolitical tensions.
US President Donald Trump this week threatened eight European countries, including Britain, with 10 percent tariffs on exports from next month unless they supported his ambition to annex Greenland.
Capital Economics economist Paul Dales said he expects inflation to fall to 2 percent in April, prompting the MPC to cut rates to 3 percent this year.
“Trump’s threatened tariffs pose the risk of additional downward pressure on inflation going forward,” he said.
