Inflation came in below expectations in December 2025, according to the latest ONS figures.
Some Key Terms
When reading about inflation, there are some key terms to be aware of:
- Inflation – a general rise in prices
- Disinflation – a fall in the rate of inflation, where prices are still going up but at a slower rate
- Deflation – a general fall in prices
- Consumer Price Index (CPI) – the rate at which the prices of goods and services bought by households increase and decrease. This measure of inflation does not include the costs of home ownership
- Consumer Price Index including Owner Occupiers’ Housing Costs (CPIH)– this extends CPI to include the costs associating with owning, maintaining and living in your own home, along with council tax
- Retail Prices Index (RPI) – a measure of inflation that tracks the average change in prices of goods and services. The Office for National Statistics (ONS) compare price changes in a basket of around 700 consumer goods to calculate RPI
- Core inflation – a measure of inflation that does not account for volatile prices, which can highly fluctuate, such as food and energy prices. It looks more at the underlying rate of inflation
Inflation Drops
UK inflation unexpectedly dropped in December, meaning some are hoping for a cut to the interest rate next month.
The Consumer Prices Index (CPI) rose by 2.5% in the 12 months to December 2024, which is down from 2.6% in November, and a far cry from the peak of 11.1% seen in October 2022. This recent figure of CPI is the first bit of disinflation we have seen for three months.
Core inflation was down to 3.2% in December 2024, down from 3.5% in November. This is far lower than the 7.3% rate of core inflation seen in May 2023, which was the highest rate seen since 1992.
What’s Responsible for this Decrease?
“Inflation eased very slightly as hotel prices dipped this month, but rose a year ago. The cost of tobacco was another downward driver, as prices increased by less than this time last year.
“This was partly offset by the cost of fuel and also second-hand cars, which saw their first annual growth since July 2023.” – ONS economist, Grant Fitzner
As shown by the graph, the annual inflation rate for restaurants and hotels was 3.4% in December, down from 4% in November. This is the lowest annual rate seen since July 2021.
Summary
Whilst inflation remains above the Bank of England’s 2% target, this fall signals some relief.
Ruth Gregory, deputy chief UK economist as Capital Economics, commented:
“Our forecast is that CPI inflation will rebound in January, perhaps to almost 3.0% and that inflation will be a bit higher than most expect in the first half of this year. But we expect it to drop below the 2% target next year as the persistence of inflation fades further.
“Overall, next Tuesday’s release of the wage growth figures for November will shed more light, but for now, we remain content with our forecast that the Bank will cut rates from 4.75% to 4.50% in February.”