UK Inflation Ticks Higher In December As Services Prices Firm
- Headline rises to 3.4% y/y, modestly above forecasts - Tobacco, airfares, food lift costs; rent inflation eases - Service costs edge higher with goods prices still contained - Economists see sharp slowdown ahead, BoE target in sight by spring
LONDON – UK inflation reaccelerated in December for the first time in six months, a development that economists said was not entirely unexpected.
The Office for National Statistics said headline consumer price inflation rose to 3.4% y/y in December, a tenth above the 3.3% consensus forecast and up from 3.2% in November. On the month, CPI increased 0.4% in line with expectations and reversed November’s 0.2% decline. Core CPI was unchanged at 3.2%, a tenth softer than forecast.
Grant Fitzner, the ONS’s chief economist, said the increase was partly driven by higher tobacco prices following recent excise duty rises.
“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,” Fitzner said. “Rising food costs, particularly for bread and cereals, were also an upward driver.”
Partially offsetting the gains were slower rent inflation and lower prices for a range of recreational and cultural purchases.
Statisticians said CPI goods inflation rose to 2.2% y/y from 2.1%, while the services rate increased a tenth to 4.5%.
Sanjay Raja, chief UK economist at Deutsche Bank, said that despite the uptick, the “landing zone” for inflation was coming into view.
Among the more constructive elements of the report, Raja highlighted softer-than-expected private rents and lower hotel prices. He also pointed to continued discounting and promotions, particularly in electronics and health goods, as a dampening force on prices.
“The earlier index collection period (9 December) also unwound many of the upside risks in our projection for things like travel and transport prices,” Raja said.
Factory gate prices hold
Producer price data was more subdued. Output prices rose 3.4% y/y in December, matching forecasts and unchanged from November. On the month, prices were flat, a tenth below expectations and softer than the prior reading.
The ONS said the largest contribution to annual output price inflation came from food products, which rose 4.3% y/y.
Input prices climbed 0.8% y/y, easing from 1.1% in November. On a monthly basis, costs fell 0.2%, a tenth less than expected and cooler than the previous 0.3% increase.
Fitzner said the slowdown in raw material costs for businesses was driven by lower crude oil prices.
Near-term prospects
Deutsche Bank’s Raja said he anticipates a “big step down” in January, forecasting headline inflation of 3.0% y/y.
“And by spring, we expect the Bank of England’s 2% inflation target to be in sight. Indeed, lower base effects, administrative price rises, and government policy measures to ease the cost of living will help bring price growth down through the year. In fact, we think the UK will see the biggest fall in headline inflation of any G7 country this year (moving from 3.4% in 2025 to 2.3% in 2026).”
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- Headline rises to 3.4% y/y, modestly above forecasts
- Tobacco, airfares, food lift costs; rent inflation eases
- Service costs edge higher with goods prices still contained
- Economists see sharp slowdown ahead, BoE target in sight by spring
By Harry Daniels
LiveSquawk News
@HarryDaniels71
21 January 2026 | 11:30 GMT
LONDON – UK inflation reaccelerated in December for the first time in six months, a development that economists said was not entirely unexpected.
The Office for National Statistics said headline consumer price inflation rose to 3.4% y/y in December, a tenth above the 3.3% consensus forecast and up from 3.2% in November. On the month, CPI increased 0.4% in line with expectations and reversed November’s 0.2% decline. Core CPI was unchanged at 3.2%, a tenth softer than forecast.
Grant Fitzner, the ONS’s chief economist, said the increase was partly driven by higher tobacco prices following recent excise duty rises.
“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,” Fitzner said. “Rising food costs, particularly for bread and cereals, were also an upward driver.”
Partially offsetting the gains were slower rent inflation and lower prices for a range of recreational and cultural purchases.
Statisticians said CPI goods inflation rose to 2.2% y/y from 2.1%, while the services rate increased a tenth to 4.5%.
Sanjay Raja, chief UK economist at Deutsche Bank, said that despite the uptick, the “landing zone” for inflation was coming into view.
Among the more constructive elements of the report, Raja highlighted softer-than-expected private rents and lower hotel prices. He also pointed to continued discounting and promotions, particularly in electronics and health goods, as a dampening force on prices.
“The earlier index collection period (9 December) also unwound many of the upside risks in our projection for things like travel and transport prices,” Raja said.
Producer price data was more subdued. Output prices rose 3.4% y/y in December, matching forecasts and unchanged from November. On the month, prices were flat, a tenth below expectations and softer than the prior reading.
The ONS said the largest contribution to annual output price inflation came from food products, which rose 4.3% y/y.
Input prices climbed 0.8% y/y, easing from 1.1% in November. On a monthly basis, costs fell 0.2%, a tenth less than expected and cooler than the previous 0.3% increase.
Fitzner said the slowdown in raw material costs for businesses was driven by lower crude oil prices.
Deutsche Bank’s Raja said he anticipates a “big step down” in January, forecasting headline inflation of 3.0% y/y.
“And by spring, we expect the Bank of England’s 2% inflation target to be in sight. Indeed, lower base effects, administrative price rises, and government policy measures to ease the cost of living will help bring price growth down through the year. In fact, we think the UK will see the biggest fall in headline inflation of any G7 country this year (moving from 3.4% in 2025 to 2.3% in 2026).”