Surprise Inflation Jump to 3.4% May Delay Bank of England Rate Cuts
London, Thursday, 22 January 2026.
Driven by a 28.6% surge in airfares, UK inflation unexpectedly hit 3.4% in December. This resurgence likely halts immediate interest rate cuts, challenging the Bank of England’s monetary strategy.
Inflation Overshoots Forecasts
Data released by the Office for National Statistics (ONS) on Wednesday, January 21, 2026, reveals that the Consumer Prices Index (CPI) rose to 3.4% in the year to December 2025 [2]. This figure represents a 0.2 percentage point increase from the 3.2% recorded in November [2], marking the first acceleration in inflation in five months [1]. The data came in hotter than anticipated, exceeding the consensus forecast of 3.3% set by economists [4][5]. While the headline rate remains the highest among the Group of Seven (G7) nations [4], the unexpected rise is largely attributed to specific, volatile components rather than broad-based price pressures.
Analyzing the Drivers: Airfares and Excise Duties
The primary catalysts for the December uptick were sector-specific. Airfares surged by 28.6% for the month [2][5], a spike analysts attribute partly to data collection timing differences compared to the previous year [2]. Additionally, tobacco prices climbed following a 5.6% duty increase announced in the Budget on November 26, 2025 [2]. Food inflation also accelerated, rising to 4.5% in December from 4.2% the previous month—a 0.3 percentage point rise—with bread and cereal prices notably affected [3][5]. Conversely, rental price growth slowed to 4% in the year to December, the lowest annual rate since May 2022 [3].
Underlying Pressures and Service Metrics
Despite the headline increase, the underlying inflation dynamics offer a more nuanced picture. Core inflation, which excludes volatile categories such as energy, food, and tobacco, remained unchanged at 3.2% [2][3]. A deeper divergence appeared in the services sector: while overall services inflation ticked up to 4.5% from 4.4% in November [4][5], “supercore” services inflation—a critical metric for policymakers that excludes rents—actually decelerated. This measure fell to 4.2% in December, down from 4.5% the prior month [5]. This suggests that domestic price pressures may be less entrenched than the headline figure implies.
Implications for the Bank of England
The resurgence in headline CPI complicates the monetary policy outlook for the Bank of England, which had cut interest rates to 3.75% in December 2025 [2][4]. Although the Bank had previously signaled that the December rise might be a “temporary blip” [1], the data has prompted a reassessment in financial markets. Traders are now ruling out a rate reduction at the upcoming February meeting, pushing expectations for a full cut back to June [3]. With geopolitical tensions pushing gas futures up by approximately 25% in early January [4], the path to the 2% inflation target remains sensitive to external shocks.