Surprise jump in UK inflation unlikely to derail rate cuts

British inflation rose by more than expected in December, pushed higher by air fares and tobacco prices, but the fastest rate of price growth among the world’s big, rich economies is still likely to slow sharply in the coming months.

- 

A man walks past the Bank of England in central London. Financial markets are pricing one or possibly two quarter-point interest rate cuts by the BoE in 2026. AFP

Investors held steady on their bets on the Bank of England cutting interest rates later this year with services price inflation, which is closely watched by the central bank, edging up in line with analysts’ forecasts. Headline inflation headed up for the first time since July, climbing to 3.4 per cent from 3.2 per cent in November, the Office for National Statistics said, above a median forecast of a rise in consumer price inflation to 3.3 per cent in a Reuters poll of economists.

“Although the uptick is larger than expected, for now it’s a speed-bump, rather than an indication we are veering off course on the road to price stability,” Adam Deasy, an economist at PwC, said.

Services inflation rose to 4.5 per cent in December from 4.4 per cent in November.