Inflation rose to 3.4% in December – industry reaction

The Office for National Statistics (ONS) data has shown that Inflation rose to 3.4 per cent in December, slightly above forecasts, ending a five-month cooling trend.

The rise was driven mainly by tobacco duty timing and volatile air fares. Core inflation held steady at 3.2 percent, while services inflation rose modestly to 4.5 percent, below expectations.

ONS Chief Economist Grant Fitzner said “Inflation ticked up a little in December, driven partly by higher tobacco prices, following recently introduced excise duty increases. Airfares also contributed to the increase with prices rising more than a year ago, likely because of the timing of return flights over the Christmas and New Year period. Rising food costs, particularly for bread and cereals, were also an upward driver.

“These were partially offset by a fall in rents inflation and lower prices for a range of recreational and cultural purchases.

“The annual increase in the prices for goods leaving factories was unchanged this month while the increase in the cost of raw materials for business slowed, driven by lower crude oil prices.”

Anna Leach, Chief Economist at the Institute of Directors, said “Today’s pick-up in inflation was driven as expected by an increase in tobacco duty and a sharp increase in air fares. Food inflation edged up to 4.5% as did services inflation, to 4.4%. However, core inflation held steady. These measures are closely watched by the Bank as key drivers and indicators of underlying inflationary pressure.

“Despite this latest increase, inflation is below the Bank of England’s expectations, and is still expected to fall back decisively during 2026. Inflation for 2025 as a whole averaged 3.4%, a little below the OBR’s latest forecast, and they expect inflation to come down to 2.5% this year, aided by Budget decisions on household energy bills and fuel duty. These decisions knock 0.3% points of headline inflation in 2026, and 0.5% in April alone. Lower inflation and a pretty tepid economy should create space for interest rates to come down further, and provide some welcome support to businesses and consumers.”

Neil Rudge, Chief Banking Officer at Shawbrook, said “SMEs will be disappointed by the latest news that price rises increased in December. However, the better than expected GDP reading last week was a pleasant surprise – and offers hope to the nation’s business community that better economic conditions will materialise this year.”

“With interest rates also on a downward trajectory, many SMEs will be looking at taking out additional funding arrangements this year as they gear up for growth. Finding a lending partner with the right expertise and flexibility is key, and businesses should consider looking at specialist options alongside the usual high street brands to help unlock maximum value.

Mike Randall, CEO at Simply Asset Finance said “A rise in inflation is a slight bump in the road, but there are hopes this is simply the economy “settling” rather than the start of a new spike. If recent growth figures are anything to go by, the UK has more momentum than many expected, suggesting this is a small setback on a generally better path.

“The Government must keep a close eye on small business margins to ensure lasting growth – with materials, energy, and services costs a constant worry. But there’s also work to be done to increase awareness of the help available to businesses as they look to set a robust path to growth. With 54% of SMEs now feeling they are less likely to get a loan approved than they were two years ago, breaking down these barriers offers a huge opportunity to empower businesses to unlock their potential in 2026.”

John Phillips, CEO of Just Mortgages and Spicerhaart, said “A jump in inflation in December may not be too much cause for concern, so long as it is a seasonal blip and not the start of inflation rising. It is hoped that once the Christmas effect works its way through, we see a return to the good progress made on easing inflation. Without another update until after the MPC decision in early February, this will be the central bank’s most recent reference point. Add in continued geopolitical and economic uncertainty, and I’d be surprised to see anything but a hold when the bank next meets in a couple of weeks.

“Nonetheless, the mortgage market has started 2026 with a spring in its step, as the pent-up demand of Q3&4 begins to release. There’s plenty for brokers to shout about at the moment with rates cut across all parts of the market and access to the most mortgage products since 2007 – particularly for first-time buyers. Lenders stand ready and willing to lend – brokers are ready to help buyers and movers navigate the market. It’s up to us to keep nurturing confidence and encouraging clients to push on with plans. We of course don’t know how the year will play out – particularly as President Trump continues to try and stake his claim to more territories and throw around more tariffs – but there’s definitely scope for more positive news in the mortgage market as the year progresses.”

Harvir Dhillon, Economist at the British Retail Consortium, said “Headline inflation took an unwelcome rise at the end of year, primarily driven by increases in food inflation and transport costs. Across retail, there was a mixed picture for shoppers. The slowdown in the housing market led to more extensive promotional activity in furniture and household equipment, which pushed prices deeper into deflation. However, with food inflation climbing to 4.5% and wage growth slowing, households are still feeling the squeeze. There was some respite for shoppers with the price of some breakfast items such as yoghurt, jam and honey falling on the month.

“Headline inflation has been slow to fall from its summer peak and remains higher than at the start of the year. Within retail, this reflects the high costs currently buffeting businesses, including NI, labour costs, and packaging taxes, all of which have pushed up costs. Government must not be complacent about inflation; if incoming regulations, such as the Employment Rights Act, increase costs further, this will be felt by consumers – not only in higher prices, but from the knock-on impact to jobs, which have already fallen significantly over the past year.”

Martin Sartorius, Lead Economist, CBI, said “Inflation edged up slightly in December, broadly in line with consensus expectations. However, we anticipate that this increase will prove to be temporary. Price pressures are set to ease noticeably this year, particularly as the impact of last year’s energy and utility price hikes fades away.

“We expect the Bank of England’s Monetary Policy Committee to cut rates again early this year, if inflation slows as anticipated. However, the Committee will remain cautious about the timing of the next cut and the scope for any additional reductions as it looks for further evidence that underlying price pressures and inflation expectations are easing.”

Suren Thiru, ICAEW Economics Director said “The recent easing in the financial squeeze on consumers came to a shuddering halt in December as a Christmas jump in flight and food costs and the higher tobacco duties triggered an awkward acceleration in inflation.

“Though rising services inflation is a warning sign that underlying price pressures remain stubbornly sticky, the intensifying downward pressure from weaker wage growth and rising unemployment should help put it on a more consistent downward path.

“December’s increase is a temporary blip with the near-term trajectory for UK inflation largely locked in, as lower energy bills from April coupled with falling fuel and food costs should pull it back to 2% by the summer.

“These figures make a February interest rate cut look improbable by reinforcing concerns over persistent price pressures, particularly as policymakers may want to assess the effect of escalating geopolitical tensions before loosening policy again.”

James Smith, Research Director at the Resolution Foundation, said “UK inflation ended last year on a ‘high’ with an unwelcome uptick in price rises. And while Britain hopes to lead the G7 economic leaderboard for growth, it has instead spent the last seven months at the top of the charts for inflation instead.

“But big falls are due in 2026, with inflation finally returning to back to more normal levels. However, the scars from a long period of acute price pressures will continue to be felt by families.”