UK inflation rose for the first time in five months over the Christmas period, driven by higher tobacco prices following tax increases announced by the chancellor and a sharp rise in airfares, according to official figures.
Data published on Wednesday by the Office for National Statistics showed that inflation increased to 3.4 per cent in December, up from 3.2 per cent in November and above economists’ expectations. It marked the first rise in the cost of living since July last year and leaves inflation well above the Bank of England’s 2 per cent target.
When Labour entered government in July 2024, inflation stood at 2.2 per cent.
The ONS said the increase was driven by an acceleration in tobacco prices, alongside higher airfares and rising food costs. Across her October 2024 and November 2025 budgets, the chancellor, Rachel Reeves, raised duties on tobacco products and introduced a new levy on vapes.
Alcohol and tobacco inflation rose to 5.2 per cent in December, up from 4 per cent the previous month, while airfares surged by 28.6 per cent year-on-year. Food inflation also edged higher, climbing to 4.5 per cent from 4.2 per cent, with bread and cereals among the biggest contributors.
Paul Dales, chief UK economist at Capital Economics, said the timing of the Budget had a significant impact on the figures. “The later-than-usual Budget on November 26 meant that the rise in tobacco duties was only captured in the ONS’s December survey,” he said.
Grant Fitzner, chief economist at the ONS, said inflation had “ticked up a little” in December, driven partly by higher tobacco prices following recent excise duty increases. He added that airfares also contributed, “likely because of the timing of return flights over the Christmas and New Year period”. Rising food costs were another upward pressure.
Some categories helped offset the increase. The ONS said weaker price growth for recreational and cultural activities put downward pressure on inflation during the month.
The uptick in inflation follows data earlier this week showing unemployment stuck at 5.1 per cent, close to a five-year high, although the economy expanded by a faster-than-expected 0.3 per cent in November.
Responding to the figures, Reeves said the government’s “number one focus is to cut the cost of living”, adding that “this is the year that Britain turns a corner”. She was speaking from Davos, Switzerland, where she is attending the annual World Economic Forum.
Economists at the Bank of England believe the rise in inflation will be temporary, with price growth expected to return towards target by the spring as household energy bills fall. Financial markets are pricing in two interest rate cuts this year, taking Bank rate to 3.25 per cent from 3.75 per cent, after four reductions in 2025.
Nicolas Crittenden, associate economist at the National Institute of Economic and Social Research, said the rise did not signal entrenched inflation. “Higher tobacco duty and airlines raising prices for festive travellers are the main drivers of this minor increase and do not indicate permanent price rises across the wider economy,” he said. Inflation, he added, was still expected to fall towards 2 per cent this year as wage growth weakens and energy prices stabilise from April.
Services inflation, a domestically focused measure closely watched by the Bank of England, rose to 4.5 per cent in December from 4.4 per cent the previous month. Core inflation, which strips out food and energy, was unchanged at 3.2 per cent.
Commenting on the wider implications for housing, Propertymark said the market had shown resilience despite ongoing economic uncertainty.
Nathan Emerson, chief executive of Propertymark, said: “Despite considerable political and economic uncertainty, it is positive to see the housing market deliver sustained momentum over the last twelve months. Industry data suggests there were around 82,000 additional housing transactions last year compared with the year before, underlining growing consumer confidence and affordability in many regions.”
Looking ahead, he added: “As we move further into 2026, there are encouraging signs that the housing market will continue to grow. However, with inflation seeing a slight increase, there could be hesitation from the Bank of England over further cuts to base rates in the short term, until conditions prove more supportive.”
On the rental market, Emerson warned that inflationary pressures remained acute for tenants. “Any increase in potential average rents rightly raises concerns for consumers already squeezed by the cost of living,” he said. “Although rental inflation has continued to trend downwards, the sector still suffers from a chronic undersupply of homes relative to demand.”
He added that regulatory changes and increasingly tax were placing additional strain on landlords, further tightening stock levels and exacerbating pressures across the rental market.
