First rise since July! Tobacco and aviation push up UK December CPI, but "one-off" factors make it difficult to change interest rate cut expectations.

The UK inflation rate has risen for the first time in five months, but this increase is expected to be temporary as the government plans to take measures to ease the pressure of rising prices in the spring. The UK Office for National Statistics said on Wednesday that the Consumer Price Index (CPI) rose by 3.4% year-on-year in December 2025, higher than 3.2% in November. This increase is slightly higher than the economists' forecast of 3.3%. The UK Office for National Statistics released data indicating that this price increase is the first occurrence since July 2025, mainly driven by an increase in tobacco taxes and rising airfares. It is worth noting that airfare prices have always been a volatile part of the consumer shopping basket. Meanwhile, the key indicator of service sector inflation, closely monitored by the Bank of England to measure domestic inflation pressures, has risen from 4.4% to 4.5%, lower than market expectations. The Bank of England expects the inflation rate to approach its target level of 2% by spring. At the same time, the bank predicts that the Chancellor of the Exchequer, Rachel Reeves's budget - including measures such as freezing railway fares and reducing energy bills - will reduce the price increase by about 0.5 percentage points. However, the Bank of England has signaled that its rate-cutting cycle is nearing an end, and is closely monitoring developments in the labor market for signs of weakness. After the data was released, the pound fell slightly, then narrowed its losses and held steady at around $1.3440. Expectations of a rate cut by the Bank of England did not change significantly in early trading, with a 70% chance of another rate cut by the end of the year. Yael Selfin, Chief Economist at KPMG UK, said, "The inflation rate is likely to gradually decline in the coming months, with energy and food prices expected to fall." "Although service sector inflation rose in December, it was not driven by domestic price pressures, but mainly by categories with large fluctuations such as airfares," she said. "The Monetary Policy Committee may not pay too much attention to this." In particular, the inflation report released on Wednesday presented the following key information: Due to timing factors, tobacco prices rose by 3% month-on-month. This is due to tariff hikes announced in last year's budget, which were implemented in 2024, a month later than in previous years. Airfares, which experienced a significant decline in November, rebounded strongly in December, rising by 28.6% month-on-month, far surpassing the previous month's decline and exceeding the 16.2% year-on-year increase. This change was mainly due to scheduling adjustments for return flights during Christmas and New Year, pushing the annual inflation rate in the transport sector to its highest level since 2022. Inflation in food and non-alcoholic beverages also showed a slight upward trend. In the year to December 2025, prices in this category rose by 4.5%, higher than the previous month's 4.2%. This price increase was mainly driven by rising prices for bread and cereal products. The UK Office for National Statistics pointed out that rent and a range of entertainment and cultural consumption items acted as a brake on overall inflation. Prices of goods such as games, camping equipment, and sports equipment fell year-on-year. Overall, UK inflation was driven up by increases in tobacco and airfare prices. During the period from November to December 2025, factors affecting the annual inflation rate of the UK Consumer Price Index included positive signs that supply chain pressure is gradually easing. Specifically, factory gate prices remained stable in the month, with no increase, while fuel and raw material costs decreased. Due to the continued decline in oil prices, the annual input price inflation rate significantly narrowed, staying at a low level of 0.8%. Ana Andrade and Dan Hanson, economists at Bloomberg, analyzed, "Although inflation rose slightly in December, it is unlikely to cause concern for the Bank of England. This upward trend was within expectations, and there are clear signs that potential price pressures are continuing to ease. Given the rapid decline in overall inflation this year, this provides room for the Bank of England to further implement rate cuts. However, the central bank remains concerned about whether the downward trend in inflation will continue, which will be a key factor hindering the adoption of any significant loose monetary policy. We predict that the Bank of England's next rate cut will be the last in this cycle and is expected to be implemented in the spring." Policy makers at the central bank are facing a dilemma: on one hand, they need to be vigilant against the potential threat posed by wage growth deviating from the established inflation target; on the other hand, signs of worsening labor market contraction cannot be ignored. It is widely expected that the central bank's likelihood of taking rate-cutting measures at the upcoming interest rate meeting in February is very low, with the cumulative rate cut expected to reach 41 basis points by the end of the year. Data released on Tuesday showed a significant slowdown in wage growth in the private sector in the three months ending in November, dropping to the lowest level since 2020; meanwhile, the unemployment rate remained stable at 5.1%. In addition, tax-related data further revealed a decline in the number of employed workers in December 2025, the largest drop since 2020. However, other economic data also showed some positive signs of stabilization: in the three months ending in December, the number of job vacancies rebounded; and last week's GDP data was also impressive, exceeding market expectations - with strong economic growth of 0.3% in November.