Chancellor Rachel Reeves insisted the UK economy was on course to recover despite a rise in inflation which dimmed hopes of an early interest rate cut.
Prices grew 3.4% in the 12 months to December, the first increase in five months. Airfares, tobacco and basic food products, such as bread and cereal, contributed to the uplift from November’s figure of 3.2%, as measured by the consumer prices index.
Analysts believe persistent inflation will push back a rate cut to later in the year.
However, the Chancellor remained optimistic. “My number one focus is to cut the cost of living. At the budget I announced £150 off energy bills, a freeze to rail fares for the first time in 30 years, a freeze to prescription charges for the second year running, and an increase to the national minimum and living wage.
“Money off bills and into the pockets of working people is my choice. There’s more to do, but this is the year that Britain turns a corner.”
Stuart Morrison, research manager at the British Chambers of Commerce said: “Today’s data is a stark reminder that the UK inflation waters remain choppy.
“With CPI rising to 3.4% in December, it’s clear the path to hitting the Bank of England’s 2% target will have further twists and turns. Hopes of another interest rate cut at the start of February now look very unlikely.
“Our latest survey shows inflation remains a key concern for businesses cited by 56% of respondents. The threat of more US tariffs in the coming weeks will only increase price concerns among the firms we represent.
“Business confidence remains weak, and the Budget was a missed opportunity to turbocharge the economy. As firms look ahead to uncertain 2026, they need the Government to deliver on growth. That means action to boost investment, transform productivity and support trade.”
Martin Sartorius, lead economist at the 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.”
Alice Haine, personal finance analyst at investment platform Bestinvest by Evelyn Partners, said: “The December uptick is expected to be short-lived, with the slowdown in price pressures seen in the final few months of 2025 set to resume this year.
“Encouragingly, underlying inflationary pressures are continuing to ease. Core inflation, which strips out more volatile items such as food, alcohol and tobacco, held steady at 3.2% in December from 3.2% in November, though services inflation edged up to 4.5% from 4.4%, signalling a broader cooling in domestically driven price pressures.
“The Bank of England believes inflation has already peaked, with the headline figure expected to ease back towards its 2% target by the end of this year.
“Lower inflation, coupled with unemployment at a five-year high 56.1% and easing wage growth are likely to pave the way for further interest-rate cuts in 2026.
“However, that relief might not happen as soon as households would like. Financial markets currently view a Spring rate cut more likely than a move at the Monetary Policy Committee’s next meeting in early February.”
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