UK Consumer Price Index for December 2025: Moderating Inflation Signals Amid Persistent Challenges
Key Takeaways: December 2025 UK CPI eased to 3.20% YoY from November’s 3.40%, marking a notable slowdown in inflationary pressures. Core inflation remains sticky, while energy and food prices contributed to volatility. Monetary policy faces a delicate balancing act amid mixed signals from financial markets and ongoing geopolitical risks. Fiscal policy adjustments and structural trends will shape the inflation trajectory in 2026.
Table of Contents
The UK Consumer Price Index (CPI) for December 2025, released on January 8, 2026, showed a year-over-year inflation rate of 3.20%, down from 3.40% in November 2025. This marks a modest but meaningful deceleration in headline inflation, reflecting easing pressures in energy and some food categories. Month-over-month, inflation edged down by 0.20 percentage points, continuing a trend of gradual moderation after the summer peak of 4.10% in August 2025.
Drivers this month
- Energy prices declined by 1.50% MoM, contributing -0.12 pp to headline inflation.
- Food inflation remained elevated at 5.00% YoY but slowed from 5.40% in November.
- Shelter costs rose 0.30% MoM, adding 0.08 pp to the monthly CPI increase.
- Core inflation (excluding energy, food, alcohol, and tobacco) held steady at 4.10% YoY, indicating persistent underlying price pressures.
Policy pulse
The 3.20% headline CPI remains above the Bank of England’s 2% target but signals a downward trajectory. This moderation may reduce immediate pressure for aggressive rate hikes, though core inflation’s stickiness suggests a cautious approach. The BoE’s Monetary Policy Committee (MPC) is likely to maintain a vigilant stance, balancing inflation control with growth concerns.
Market lens
Immediate reaction: GBP/USD strengthened 0.30% in the first hour post-release, reflecting optimism about easing inflation. UK 2-year gilt yields fell by 5 basis points, signaling reduced expectations for near-term rate hikes. Breakeven inflation rates for 5 years declined slightly, underscoring market confidence in inflation’s downward path.
December’s CPI reading is part of a broader inflation narrative shaped by multiple macroeconomic factors. The 3.20% YoY inflation compares to 3.40% in November and a 12-month average of 3.80%, highlighting a clear deceleration from mid-2025 peaks. This easing aligns with softer commodity prices and a stabilizing supply chain environment.
Monetary Policy & Financial Conditions
The Bank of England’s base rate currently stands at 5.25%, unchanged since November 2025. Financial conditions have tightened moderately, with credit spreads widening slightly amid global uncertainties. The MPC’s forward guidance emphasizes data dependency, with inflation prints like December’s critical for future decisions.
Fiscal Policy & Government Budget
Fiscal policy remains moderately expansionary, with the government maintaining targeted support for energy costs and low-income households. The 2025 Autumn Statement projected a budget deficit of 3.50% of GDP for 2026, reflecting ongoing stimulus efforts to support growth amid inflation moderation.
External Shocks & Geopolitical Risks
Global energy markets have stabilized following supply disruptions earlier in 2025, easing inflationary pressures in the UK. However, geopolitical tensions in Eastern Europe and trade uncertainties with China continue to pose risks to commodity prices and supply chains.
What This Chart Tells Us
Market lens
Immediate reaction: The GBP strengthened modestly against the USD and EUR, reflecting market relief at the inflation slowdown. UK government bond yields declined, indicating reduced expectations for aggressive monetary tightening. Inflation-linked gilts saw slight gains, consistent with a more benign inflation outlook.
Looking ahead, the UK inflation outlook is shaped by several competing forces. The base case scenario assumes continued moderation in headline inflation toward the 2.50% range by mid-2026, supported by stable energy prices and easing supply constraints. Core inflation, however, may remain elevated near 4%, reflecting wage pressures and housing costs.
Scenario Analysis
- Bullish (20% probability): Inflation falls rapidly below 2.50% by Q3 2026, enabling the BoE to pause or cut rates. This scenario depends on sustained global commodity price declines and subdued wage growth.
- Base (60% probability): Inflation gradually declines to 2.50-3.00% by year-end 2026, with the BoE maintaining a cautious stance. Core inflation remains sticky but manageable.
- Bearish (20% probability): Inflation rebounds above 3.50% due to renewed energy shocks or wage-price spirals, forcing further monetary tightening and risking growth slowdown.
Risks to Monitor
- Geopolitical disruptions impacting energy and food prices.
- Labour market tightness fueling wage inflation.
- Fiscal policy shifts that could either stimulate demand or tighten conditions.
December 2025’s CPI data from the Sigmanomics database confirms a slowing inflation trend in the UK, offering some relief to policymakers and markets. However, persistent core inflation and external uncertainties counsel caution. The Bank of England faces a complex environment requiring nimble policy responses to balance inflation control with growth support.
Structural factors such as housing market dynamics and wage growth will remain key inflation drivers in the medium term. Meanwhile, fiscal policy and geopolitical developments will continue to influence the inflation path and financial conditions. Investors and policymakers alike should prepare for a nuanced inflation environment in 2026.
Key Markets Likely to React to CPI
The UK CPI release is a critical data point for several markets that closely track inflation trends. Currency pairs like GBPUSD typically respond swiftly to inflation surprises, reflecting shifts in monetary policy expectations. UK government bonds, represented by UKGILT, are sensitive to inflation outlooks and central bank guidance. The equity market, tracked by FTSE100, reacts to inflation through earnings and cost pressures. Additionally, the cryptocurrency market, with pairs like BTCUSD, often moves on inflation-driven risk sentiment. Lastly, the EURGBP pair EURGBP is influenced by relative inflation and monetary policy differentials between the UK and Eurozone.
FAQ
- What does the December 2025 UK CPI reading indicate?
- The 3.20% YoY inflation rate indicates a slowing but still elevated inflation environment, with core inflation remaining sticky.
- How might the Bank of England respond to this CPI data?
- The BoE is likely to maintain a cautious approach, balancing inflation control with growth risks, possibly pausing rate hikes if the trend continues.
- What are the main risks to the UK inflation outlook?
- Key risks include geopolitical shocks affecting energy prices, wage-driven inflation, and fiscal policy changes that could alter demand dynamics.
Key takeaway: UK inflation is moderating but remains above target, requiring careful policy calibration amid persistent core pressures and external uncertainties.
Updated 1/8/26
This has been drafted with AI assistance and then thoroughly reviewed, refined, and approved by our human editorial team to ensure accuracy, and originality.
December 2025’s headline CPI of 3.20% YoY compares to November’s 3.40% and the 12-month average of 3.80%, signaling a clear downward trend. Month-over-month, the index fell by 0.20 percentage points, driven primarily by energy price declines and slower food inflation.
Core inflation remains elevated at 4.10% YoY, unchanged from November, underscoring persistent price pressures in services and shelter costs. This divergence between headline and core inflation highlights ongoing structural challenges in the UK economy.