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UK inflation climbs for first time in five months
The UK's annual inflation rate increased to 3.4% in December, exceeding forecasts and marking its first rise since July, driven by higher tobacco taxes and seasonal airfare spikes, official data revealed on Wednesday.
One-off factors behind December surge
Economists attributed the uptick to temporary influences, including a tobacco duty increase announced in the November Budget and elevated flight costs over the Christmas period. Most analysts dismissed the rise as the start of a sustained upward trend.
Michael Saunders, a former Bank of England policymaker, described the increase as "a variety of fairly temporary erratic factors" and predicted the central bank would proceed with "gradual" interest rate cuts later this year, though not at its upcoming February meeting.
"The reason they can't cut quickly is because inflation and pay growth are still too high for comfort."
Michael Saunders, former Bank of England rate-setter
Christmas travel and tobacco taxes fuel rise
The Office for National Statistics (ONS) identified airfares and tobacco as the primary contributors to December's inflation rise. Flight prices surged due to the timing of return journeys around Christmas and New Year, while tobacco costs climbed following the November duty increase.
Grant Fitzner, the ONS's chief economist, also highlighted rising food prices, particularly for bread and cereals, as a key upward pressure. Food and non-alcoholic drink prices rose by 4.5% over the year, squeezing household budgets during the festive season.
"Rising costs meant households were feeling the squeeze, resulting in a subdued Christmas for the sector."
Balwinder Dhoot, Food and Drink Federation
Political reactions and economic outlook
Chancellor Rachel Reeves responded to the figures by reaffirming her focus on reducing living costs, pointing to measures such as frozen rail fares and prescription charges in the recent Budget. She stated, "This is the year that Britain turns a corner."
Shadow Chancellor Mel Stride, however, blamed the government's "economic mismanagement," arguing that high taxes and borrowing were stifling growth and exacerbating inflation.
Mixed trends in housing and transport
While December's inflation data showed some relief in housing costs-with rents rising at a slower annual rate of 4.9% compared to 5.1% in November-transport prices climbed by 4%, largely due to airfares. Sarah Coles, head of personal finance at Hargreaves Lansdown, explained the discrepancy as a result of timing differences in price measurements between 2024 and 2025.
UK lags behind European neighbours
The UK's inflation rate remained higher than that of key European peers in December. Germany recorded a 2% annual rate, while France's stood at 0.7%. Economists, however, expect UK inflation to decline sharply in January, with Deutsche Bank's Sanjay Raja forecasting the Bank of England's 2% target to be "in sight" by spring.
"We think the UK will see the biggest fall in headline inflation of any G7 country this year."
Sanjay Raja, Deutsche Bank
