The UK Consumer Price Index (CPI) for December 2025 was released on December 4th, showing a year-over-year inflation rate of 3.40%, unchanged from November’s figure. This steady reading comes amid a backdrop of moderate economic growth and ongoing global uncertainties. The data, sourced from the Sigmanomics database, reflects the UK’s inflation trajectory over the past year and provides insight into the evolving macroeconomic environment.

Drivers this month

• Energy prices contributed 0.25 percentage points (pp), reflecting recent volatility in global oil and gas markets.
• Food inflation remained elevated at 0.40 pp, driven by supply chain disruptions and adverse weather impacts.
• Housing and utilities added 0.18 pp, consistent with rising shelter costs and utility tariffs.
• Transport costs eased slightly, subtracting -0.05 pp due to lower used car prices.

Policy pulse

The 3.40% CPI reading remains above the Bank of England’s 2% inflation target, sustaining pressure on monetary policy. The BoE has maintained a cautious stance, keeping the base rate at 5.25% since October, signaling a wait-and-see approach amid mixed inflation signals and slowing growth indicators.

Market lens

Immediate reaction: GBP/USD dipped 0.15% in the first hour post-release, reflecting investor caution. UK 2-year gilt yields edged up 3 basis points, pricing in a modest chance of further rate hikes. Inflation breakeven rates held steady near 3.50%, indicating stable medium-term inflation expectations.

The December CPI reading of 3.40% YoY aligns with the recent inflation plateau observed since mid-2025. Compared to the 12-month average of 3.60%, the current figure signals a slight easing but remains elevated relative to the post-pandemic norm of 2.10% in 2023. Core CPI, excluding volatile food and energy, stands at 3.00%, underscoring persistent underlying price pressures.

Monetary policy & financial conditions

The Bank of England’s monetary tightening cycle, which began in late 2024, has slowed inflation but not yet returned it to target. Financial conditions remain moderately tight, with mortgage rates averaging 5.10%, impacting consumer spending and housing market activity. The sterling’s modest depreciation against the dollar has partially offset imported inflation pressures.

Fiscal policy & government budget

Fiscal consolidation efforts continue, with the government targeting a budget deficit reduction to 3.80% of GDP in 2025–26. Recent tax adjustments and spending caps aim to temper demand-side inflation but risk constraining growth. Public sector wage growth remains subdued, limiting second-round inflation effects.

External shocks & geopolitical risks

Ongoing geopolitical tensions in Eastern Europe and supply chain disruptions from Asia have sustained commodity price volatility. The UK’s trade exposure to EU and global markets adds vulnerability to external shocks, which could reignite inflationary pressures if energy prices spike or supply bottlenecks worsen.

Drivers this month

• Energy prices: 0.25 pp, reflecting recent OPEC+ production adjustments and winter demand.
• Food prices: 0.40 pp, driven by higher import costs and agricultural disruptions.
• Housing & utilities: 0.18 pp, consistent with rising rents and energy tariffs.
• Transport: -0.05 pp, due to easing used car prices and fuel cost moderation.

Policy pulse

The Bank of England’s policy rate at 5.25% reflects a calibrated approach to inflation control. The steady CPI reading supports the view that further hikes may be limited unless inflation accelerates. Market-implied probabilities assign a 30% chance of a rate increase in Q1 2026, with risks skewed to the upside if energy prices surge.

Market lens

Immediate reaction: GBP/USD fell 0.15%, UK 2-year gilt yields rose 3 bps, and inflation breakeven rates held steady. The market interprets the steady CPI as a sign of persistent inflation but limited near-term tightening.

Looking ahead, the UK inflation outlook balances several competing forces. Supply chain normalization and fiscal restraint may ease price pressures, but energy market volatility and geopolitical risks could reignite inflation spikes. The Bank of England faces a delicate task managing inflation expectations without derailing growth.

Bullish scenario (20% probability)

• Global energy prices decline sharply, easing headline inflation below 2.50% by mid-2026.
• Supply chains normalize, reducing food and goods price pressures.
• Monetary policy remains steady, supporting a soft landing for the economy.

Base scenario (55% probability)

• Inflation holds near 3.00–3.50% through 2026, with core inflation sticky around 3.00%.
• Monetary policy remains cautious, with limited rate hikes.
• Fiscal consolidation continues, balancing growth and inflation risks.

Bearish scenario (25% probability)

• Energy prices spike due to geopolitical shocks, pushing inflation above 4.00%.
• Supply chain disruptions worsen, sustaining high food and goods inflation.
• BoE resumes aggressive rate hikes, risking recessionary pressures.

The December 2025 UK CPI reading confirms a persistent inflation environment, with headline and core rates well above the BoE’s target. Monetary policy remains data-dependent, balancing inflation control with growth risks. External shocks and fiscal policy will be key to the inflation trajectory in 2026. Market participants should monitor energy prices, supply chain signals, and central bank communications closely.

Key Markets Likely to React to CPI

The UK CPI release typically influences currency, bond, and equity markets sensitive to inflation and interest rate expectations. Key symbols to watch include GBPUSD for currency moves, FTSE100 reflecting equity sentiment, HSBA (HSBC Holdings) as a major UK bank sensitive to rates, EURGBP for cross-currency inflation differentials, and BTCUSD as a risk sentiment proxy.

FAQs

What does the UK CPI reading mean for inflation trends?

The 3.40% CPI indicates persistent inflation above target, driven by energy, food, and housing costs, suggesting ongoing price pressures.

How might the Bank of England respond to this CPI data?

The BoE is likely to maintain a cautious stance, possibly pausing rate hikes unless inflation accelerates beyond current levels.

What are the risks to the UK inflation outlook?

Risks include energy price shocks, supply chain disruptions, and fiscal tightening, which could either exacerbate or ease inflation pressures.

Takeaway: UK inflation remains stubbornly above target, requiring vigilant monetary and fiscal policy coordination amid uncertain external conditions.

This has been drafted with AI assistance and then thoroughly reviewed, refined, and approved by our human editorial team to ensure accuracy, and originality.

Updated 12/4/25