December’s data shows headline inflation jumping to 3.4%, reversing the encouraging steps forward in the UK’s economic adjustment.
This brings inflation further away from the Bank of England’s 2% target and reminds us that the period of intense price pressure may not be fully behind us.
Households continue to see little relief from the cost‑of‑living pressures, and this increase further undermines the consumer confidence required to sustain spending and economic demand.
Higher inflation brings worrying news for government finances. Faster price growth raises pressure on inflation-linked expenditures, and a more unstable inflation environment inhibits policymakers’ ability to plan and manage the public finances over the medium term. An upwards inflation trajectory will also unsettle the international markets, provoking fear of increases in debt interest costs.
The Bank of England will be astutely aware of the challenge ahead and may hold a more restrictive monetary policy stance for longer than anticipated. Policymakers will also be wary of domestic inflation being reignited by external influences. A renewal of global tariff pressures could apply upwards inflationary pressure as higher import costs filter through supply chains. An interest rate cut in the Spring is still possible, but we will need to see further progress in the fight against inflation.
Interest rate cuts would be welcomed across the economy. For businesses and households alike, it would point to a more supportive financial environment ahead. The Government will be hoping that a less restrictive monetary policy stance can provide a boost to economic growth.
For businesses, this would mark a shift away from crisis management towards a period of greater predictability — creating space for the much-needed investment, planning and renewed confidence that could drive economic recovery. It is vital that inflation is brought under control so the Bank can move towards this lower interest rate environment.
