UK Inflation Surges to 3.8% in December, Exceeding Forecast

The UK’s inflation rate rose to 3.8% in December 2025, according to official data released on January 21, 2026, significantly exceeding the anticipated 3.4% increase. This marks the first time inflation has exceeded 3.5% since March 2024, signaling renewed concerns about price stability across the economy. Core inflation, which excludes volatile food and energy prices, also increased to 3.2%, up from 2.9% in November, indicating broad-based underlying price pressures. The primary drivers included a 7.2% year-on-year rise in services inflation, fueled by higher costs in housing, healthcare, and transport. Energy prices rebounded with a 5.1% increase, reversing earlier declines recorded in the summer months. Food inflation remained elevated at 4.5%, although it showed signs of moderation compared to peaks above 6% seen earlier in the year. Financial markets reacted swiftly, with sterling strengthening against the euro and dollar, while UK government bond yields rose. The Bank of England now faces intensified pressure to maintain its current interest rate of 5.25%, as the latest figures suggest inflation may not be cooling as quickly as previously projected. Markets now assign an 85% probability to a rate hold at the upcoming February 2026 policy meeting, with expectations of a potential hike later in the year if conditions worsen. Households are likely to feel the strain more acutely, particularly in energy-intensive sectors. Policymakers and central bankers will closely monitor incoming data for further signs of disinflationary trends, especially given the continued strength in wage growth and consumer demand.