Highlights

  • UK CPIH inflation rose to 3.6% year-on-year in December 2025, compared with 3.5% in November.
  • Headline CPI increased to 3.4% year-on-year, with transport and alcohol and tobacco the main upward contributors.
  • Core inflation measures were unchanged, while services inflation remained elevated.

UK inflation increased in December for the first time in five months, driven by higher tobacco prices and airfares, according to official data. Both headline and core measures showed an acceleration on an annual basis, adding complexity to the outlook for interest rate policy as markets assess the timing of potential Bank of England action.

Headline Inflation Moves Higher

The Office for National Statistics reported that the Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 3.6% in the 12 months to December 2025, up from 3.5% in November. This marked the first increase in the annual CPIH rate since July.

On a monthly basis, CPIH increased by 0.4% in December, compared with a 0.3% rise in the same month a year earlier. Alcohol and tobacco, along with transport, made the largest upward contributions to the monthly movement.

CPI Also Records Faster Annual Growth

The Consumer Prices Index (CPI), the measure targeted by the Bank of England, rose by 3.4% in the year to December, up from 3.2% in November. Monthly CPI also increased by 0.4%, exceeding the 0.3% rise recorded in December 2024.

Transport costs, including air fares, were a notable contributor to the increase, alongside higher prices for alcohol and tobacco products. These categories exerted upward pressure on both CPI and CPIH annual rates.

Core Inflation Measures Hold Steady

Core CPIH, which excludes energy, food, alcohol and tobacco, rose by 3.5% in the 12 months to December, unchanged from November. Within this measure, the annual rate for goods edged up from 2.1% to 2.2%, while services inflation remained at 4.5%.

Core CPI was also unchanged on an annual basis at 3.2%. The CPI goods annual rate rose from 2.1% to 2.2%, while the CPI services rate increased from 4.4% to 4.5%, indicating continued pressure in service-related categories.

Policy Context and Market Backdrop

The inflation figures follow labour market data earlier in the week that showed further cooling in employment conditions. Together, the data add uncertainty around expectations that the Bank of England could cut interest rates in February, with the possibility that policymakers may opt to wait longer.

UK equities were lower following the data release. At 12:40 pm on 21 January, the FTSE 100 was down 28.30 points, or 0.28%, at 10,098.48.