After yesterday’s disappointing employment numbers then there may have been some hopes of a further fall in UK inflation this morning. But such hopes were in for a rude awakening.
The Consumer Prices Index (CPI) rose by 3.4% in the 12 months to December 2025, up from 3.2% in the 12 months to November.
In particular it is a poor morning for Bank of England Governor Andrew Bailey who has been driving through interest-rate cuts claiming this.
CPI inflation has fallen since the previous meeting, to 3.2%. Although above the 2% target, it is now expected to fall back towards target more quickly in the near term.
That is from the Minutes of the meeting just over a month ago where Bank Rate was cut to 3.75% and the emphasis is mine.Rather than falling back towards target it has risen. The next bit was wrong as well.
The risk from greater inflation persistence has become somewhat less pronounced since the previous meeting,
Actually as I look through the Minutes I note that the claims about wage growth were contradicted by the 4.5% number for regular earnings released yesterday.
Bank staff expected private sector regular AWE pay growth to ease to around 3½% in 2025 Q4, predominantly owing to base effects, which reflected the strength in pay growth at the end of 2024.
In fact his view since the Bank Rate cuts began has been this.
The disinflation process was on track and the key question was how sustainably inflation would settle at the 2% target.
Those who followed the Greek crisis will know that the use of the phrase “on track” was followed by an economic collapse. In this instance we see another abuse of language as the recent nadir in inflation was 1.7% in the summer of 2024 and now it is double that level which is of course a rise not disinflation.
The dissenters
Other policymakers argued with the Governor about these issues.
Clare Lombardelli: yet forward-looking indicators of wage growth from the DMP and Agents suggest little disinflation in wages over the next year. Elevated wage growth contrasts with softening labour market quantities.
As you can see the claim by the Governor that wage growth was slowing was simply not true.
Huw Pill: Underlying inflationary pressures are stronger than expected a year ago.
I think that they deserve some credit for standing up to the Governor and introducing some reality to the discussions. This matters because in my opinion the rush to cut interest-rates has ignored the fact that inflation has persisted at a level which means the Governor has had to write a series of explanatory letters to the Chancellor which used to generate some sort of shame. After the “temporary” inflation debacle where the Ban of England was asleep at the wheel as the cost of living crisis built up a head of steam the correct response this time would be to wait for clear signs of a fall.
What caused the rise in December?
One factor was this.
Tobacco duty rates will increase on 26 November 2025 by Retail Price Index (RPI)+2 percentage points and on 1 October 2026 the rates will increase by RPI+2 percentage points with an additional £2.20 per 100 cigarettes and £2.20 per 50g on all other tobacco products.
At the time Chancellor Rachel Reeves was lauding this.
The government is committed to maintaining high tobacco duty rates. (gov.uk)
But she seems to have forgotten that this morning as here she is on X or Twitter.
Our number one focus is cutting the cost of living. That’s why we’re taking £150 off energy bills, freezing rail fares and increasing minimum wage. There’s more to do, but this is the year Britain turns a corner.
The impact on inflation according to the official release is below.
Prices in the alcohol and tobacco division rose by 5.2% in the 12 months to December 2025, up from 4.0% in the 12 months to November. On a monthly basis, prices rose by 1.0% in December 2025, compared with a fall of 0.2% a year ago.
Narrowing down to tobacco.
then subsequently rose by 3.0% in December 2025, compared with a rise of 0.7% a year before.
In isolation that adds 0.04% to the CPI inflation rate.
Next up is an issue that I have been pointing out for some time looks to be out of control.
The largest upward effect came from air fares, which rose by 28.6% in December 2025. However, air fares rose by 16.2% last year, the third-lowest December rise since monthly price collection began in 2001.
What I mean by that is the measurement of airfares. There is a forum to raise such issues called StatsUserNet and in January I challenged the numbers.
There are clear issues with the measurement of airfares in December in the CPI numbers.
Air fares rose by 16.2% on the month in December 2024, down from 57.1% a year ago.
I think that this is another area that deserves further investigation as frankly the numbers look to be troubled.
There were problems with the weights too and the link is below.
There has never been an official reply to this and in my opinion it is because they do not have one and choose as Parliament (PACAC) put it to “bury bad news”.
In today’s release we get some excuses.
Part of the reason for the lower-than-usual growth in 2024 may have been because the return date for European flights in December 2024 was Christmas Eve and the return date for long-haul flights was New Year’s Eve. In contrast, the return date for European flights in December 2025 was 23 December and the return date for long-haul flights was 30 December.
Anyway this contributed to another reported rise in inflation this time around.
Prices in the transport division rose overall by 4.0% in the 12 months to December 2025, up from 3.7% in the 12 months to November. On a monthly basis, prices rose by 1.3% in December 2025, compared with a rise of 1.0% a year ago.
Food
This has been a long-running issue where even when commodity prices have weakened we have seen further rises in food prices.
On a monthly basis, food and non-alcoholic beverages prices rose by 0.8% in December 2025, compared with a rise of 0.5% a year ago.
It had looked as though things are improving but as you can see that is worse than last year. The main riser was the category for bread and cereals which rose by 2.7% on the month and was led by breakfast cereals.
The theme seems to be.
The only way is up, baby, for you and me nowThe only way is up, baby, for you and me now (Yazz)
For example US cocoa futures are 61% lower than a year ago so when will chocolate prices fall? The category that includes it with confectionery, jam and sugar rose by 0.3% on the month.
Cost of Living
This looked even more troubled this morning.
The all items RPI annual rate is 4.2%, up from 3.8% last month.
The larger move was driven by these factors.
The widening effect was mainly driven by air fares, insurance, mobile phone applications, recording media and fuels & lubricants.
By the way mobile phone apps are another area where the measurement looks to be in trouble.
Under the previous target inflation would be over 4%.
The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 4.1%, up from 3.7% last month.
So we would have a big figure of 4 for inflation rather than 3….
Comment
The situation is yet again one where the Bank of England under the direction of Governor Andrew Bailey looks weak on inflation. That contradicts their claims that they worry about inflation expectations which will be made worse both by their behaviour and today’s numbers.
Looking ahead the picture is nuanced as there is this.
Some measures announced in the Budget, in particular one-off reductions to regulatory costs levied on households’ energy bills, and changes to fuel duty, were likely to lower CPI inflation in April by around ½ percentage point.
As the October 2024 Budget raised inflation the overall effect on the annual rate should be around 1% and maybe more. Also there is some hope from this.
On a monthly basis, producer input prices fell by 0.2% and producer output (factory gate) prices showed no movement in December 2025.
But we need such factors to work quickly before the annual round of price rises in April. Also the leading indicator for services inflation rose.
Services producer prices rose by 2.9% in the year to Quarter 4 (Oct to Dec) 2025, up from a revised rise of 2.0% in the year to Quarter 3 (July to Sept). On a quarterly basis, services producer prices rose by 0.7% in Quarter 4 2025.
