UK inflation rises to 3.4% in December 2025, but overall decline still expected

Despite its first increase since July 2025, the rate of UK inflation is still broadly expected to slow throughout 2026.

The annual rate of inflation rose from 3.2% in November to 3.4% in December 2025, latest figures from the Office for National Statistics (ONS) revealed today.

Several economists had predicted that inflation would see a slight uptick in December, but the recorded increase was higher than many had expected, largely due to rising tobacco and transport costs.

This is likely to be a blow for consumers and their hard-earned money but, more encouragingly, inflation is still forecast to remain on an overall downwards trend.

“Inflation is set to fall this year, reaching its target around mid-2026. This will be promising news for savers’ returns as they could grow in ‘real’ value,” Caitlyn Eastell, Personal Finance Analyst at Moneyfactscompare.co.uk, noted.

“However, pair this with tumbling savings rates and savers may find themselves in a similar situation where their accounts are struggling to keep pace,” she warned.

Although Eastell points out that the Bank of England seems unlikely to lower the base rate at its next meeting on 5 February, which could give savers some reprieve, a cut is possible later in the year if inflation eases and gets closer to its 2% target.

Tobacco and transport drive up costs

The alcohol and tobacco sector was one of the key areas that pushed up the annual rate of inflation, with prices rising by 5.2% in the 12 months to December compared to 4.0% one month earlier. Much of this is likely to be explained by the increase in tobacco duty that came into effect on 26 November 2025.

Elsewhere, the annual rate of inflation in the transport sector rose from 3.7% in November to 4.0% in December, largely driven by air fares. The cost of air travel typically increases in December but, this year, prices were 28.6% higher than the previous month.

When looking at everyday costs that are likely to affect more consumers, car owners may be relieved to learn that the price of petrol and diesel only saw a marginal rise of 0.9% in the 12 months to December.

However, over the same period, the overall cost of food and non-alcoholic drinks increased by an average of 4.5%, compared to 4.2% in the year to November 2025. Bread and cereals saw a particularly noticeable increase in prices, while the cost of vegetables also rose slightly.

Are your savings working hard enough?

“January is the ideal time for savers to set new financial goals and to check if their savings are working as hard as they can,” Eastell commented.

“While there has been a promising jump to short-term fixed bonds, this doesn’t follow the trend as most of the top rates have dropped month-on-month, so it is crucial that savers are fast to react to attractive deals, otherwise they face missing out,” she continued.

Will the “positive momentum” continue for the mortgage market?

Fixed mortgage rates dropped significantly in 2025, as the average two-year fixed rate fell from 5.48% to 4.83% while the five-year equivalent fell from 5.25% to 4.91%.

“Last year was a notable time for the mortgage market, with lenders taking a renewed focus on their affordability restraints,” Eastell noted.

“Hopefully this positive momentum can carry on long into the new year,” she added, although she cautioned that “sticky inflation may limit the pace at which the Bank of England can make cuts”.

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