Inflation in UK accelerates

[Ben Graham]

The pound rose after news that inflation in the United Kingdom accelerated for the first time in five months. Many economists nevertheless expect the uptick to prove temporary, as the government plans measures this spring to reduce price pressures.

According to the Office for National Statistics, consumer prices in December 2025 rose 3.4% year?on?year, up from 3.2% in the previous month. Economists had forecast a 3.3% increase.

The ONS said the first rise since July was driven by higher excise duties on tobacco products and rising airfares. Services inflation, the domestic pressure gauge closely watched by the Bank of England, increased to 4.5% from 4.4%. The rise, however, was smaller than expected.

Most economists still expect the central bank to remain on the sidelines, given the broader economic uncertainty and recession risks. Government support measures for households and businesses planned for the spring are expected to have a disinflationary effect in the first quarter. That, in turn, could ease pressure on the Bank of England.

Inflation is now expected to approach the 2% target in the spring. As noted above, Chancellor Rachel Reeves's budget — which included a freeze on rail fares and measures to lower energy bills — is projected to reduce the pace of price growth by roughly 0.5 percentage point. The Bank of England has recently indicated that it is nearing the end of its rate?cut cycle and is watching the labor market closely for signs of weakening.

Keeping policy rates stable will allow authorities to assess the impact of already adopted support measures on the economy and to avoid unwanted side effects such as a sharp rise in inflation or financial instability. The key factor shaping the regulator's next moves will remain labor market conditions. Signs of labor market weakness observed yesterday could indicate slowing economic growth and weaker consumer demand. In that case the Bank of England may need to revisit its stance and resume cuts in order to support activity. Conversely, a resilient labor market with low unemployment and rising wages would signal the need to maintain tight monetary policy to contain inflation.

Over the coming months, close attention will focus on employment, wage and vacancy data. Those indicators will be central to the Bank of England's decisions on monetary policy and will determine the medium?term trajectory of the British economy.

As for GBP/USD, buyers of the pound sterling need to capture the nearest resistance at 1.3460. Only that will allow them to target 1.3490, above which a breakout would be challenging. The extended target is the area around 1.3520. If the pair falls, bears will try to seize control at 1.3425. If they succeed, a break of that range would deal a serious blow to bullish positions and could push GBP/USD down to 1.3400 with scope to extend to 1.3380.

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